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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________
Commission File Number 0-28672
OPTIKA IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4154552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5755 Mark Dabling Boulevard, Suite 100 80919
Colorado Springs, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (719) 548-9800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share.
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on March
17, 1997 as reported on the Nasdaq National Market, was approximately
$17,033,751. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of March 17, 1997, Registrant had outstanding 6,710,708 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated into Part II of this Report on
Form 10-K.
2. Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 23, 1997 is incorporated by reference
in Part III of this Form 10-K to the extent stated herein.
OPTIKA IMAGING SYSTEMS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................24
Item 3. Legal Proceedings...........................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.........................................24
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................25
Item 6 Selected Financial Data.....................................................................26
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......27
Item 8 Financial Statements and Supplementary Data.................................................32
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........32
PART III
Item 10 Directors and Executive Officers of Registrant..............................................33
Item 11 Executive Compensation......................................................................33
Item 12 Security Ownership of Certain Beneficial Owners and Management..............................33
Item 13 Certain Relationships and Related Transactions
Signatures..................................................................................34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................36
2
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "BUSINESS RISKS" CONTAINED HEREIN.
ITEM 1. BUSINESS
Introduction
Optika Imaging Systems, Inc. ("Optika" or the "Company") is a leading
provider of high-performance, client/server, integrated imaging software
designed to meet the needs of paper intensive industries such as healthcare,
financial services, insurance and retail. The Company's FilePower Suite is
comprised of server software, which provides core imaging functions, application
software for document image management, computer output to laser disc ("COLD"),
automated workflow transaction processing, and associated development tools. The
FilePower Suite is easy to install, use and integrate with end-users' existing
information systems, and is designed to be deployed at the departmental or
workgroup level and then scaled throughout the enterprise. The Company believes
that the FilePower Suite enables end-users to reduce costs, improve operational
productivity and enhance customer service. Additionally, the Company believes it
is one of the leading providers of imaging solutions to the healthcare industry,
based on 125 installations of the FilePower Suite. Approximately 13% of the
Company's total revenue in 1996 was derived from sales in the healthcare
industry. The Company is seeking to capitalize on the success of the FilePower
Suite in the healthcare industry throughout the development of the FPhealthcare
Suite, formerly known as the MediPower Suite, which is designed to enable
hospitals and other healthcare organizations to manage large amounts of patient
related documents. The FPhealthcare suite incorporates document image
management, COLD and automated workflow transaction processing technologies, and
is designed to provide fast and efficient access to patient information from
workstations located throughoutout the enterprise, including the point of
patient care.
Industry Background
The Document Image Processing Industry
Document image processing systems allow documents to be electronically
stored, retrieved and routed, and generally include the following five basic
functions: (i) document capture, (ii) optical storage, (iii) retrieval and
display, (iv) document management and (v) automated transaction processing
(workflow). Document capture is the conversion of paper documents into digitized
images and generally includes batch preparation, scanning, image enhancement,
quality assurance and indexing of images to long-term storage, including optical
disks, CD-ROM and magnetic media. Optical storage is the storage of images on
optical drives and jukeboxes and includes platter management, volume management
and hierarchical storage management. Retrieval and display is the retrieval of
document images via either standard searches (using the indices stored during
capture) or full-text indexing for display, annotation and routing. Document
management is the centralized management and administration of large volumes of
documents and typically provides a file cabinet and file folder metaphor for
retrieving documents. Workflow is the automation of routine work processes,
usually performed by the automatic routing of images as a replacement for the
manual routing of paper.
For paper intensive industries such as healthcare, financial services,
insurance and retail, electronic document image processing offers several
advantages over paper or microfilm, including: (i) faster and easier file
access, because document images are located and retrieved by entering a few key-
words into a computer database rather than by searching through file cabinets
for paper folders or microfilm; (ii) fewer misfiled documents, because database
software is used to track the location of document images; (iii) concurrent file
access, since multiple users have the ability to access a document
simultaneously; (iv) remote distribution and access, because document images are
easily transmitted to standard facsimile equipment or remote computer terminals
over commercial telephone lines; and (v)
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less expensive storage, because electronic storage generally requires less floor
space and clerical overhead than paper-based storage, thereby reducing overall
document storage costs. Once documents have been converted to an electronic
format, they can be automatically routed from one workgroup or task to another.
By implementing the automated workflow approach, companies can improve operating
efficiencies, compared to traditional paper based document processing tasks.
Several typical uses of document imaging systems include:
Patient Records Management. The effectiveness of many existing healthcare
information systems ("HCIS") is limited because many aspects of a patient's
medical record are on paper and may be located in several different departments
or at off-site storage facilities. Hospitals and other healthcare providers can
use imaging solutions to create a repository for a patient's complete medical
record, including paper-based documents such as doctors' orders and notes,
consent forms and progress notes; and computer generated information such as lab
reports, transcriptions and patient demographics. In addition, medical images
such as X-rays and CAT scans may be stored on the system. The availability of
timely and complete patient information can enable healthcare providers to
control costs while improving the quality of patient care.
Insurance Claims Processing. Insurance companies use document imaging
systems to speed claims processing. Documents associated with the claim are
imaged and indexed, so that a service representative can retrieve the documents
quickly when a customer calls, rather than having the documents delivered and
calling the customer back. This can resolve claims more quickly and improve
customer service.
Loan Processing. Loan processing at financial institutions usually involves
a large folder of documents that must be approved by many departments, and this
process can take several weeks when done manually. By implementing document
imaging, loan documents can be routed electronically to multiple departments,
including remote offices, and approvals can be collected more quickly,
increasing the institution's operating efficiencies.
Accounts Payable Processing. Accounts payable processing for retailers and
distributors with multiple geographic locations and high transaction volumes
usually involves a large number of paper-based steps and significant costs for
document storage. Imaging solutions permit accounts payable personnel to access
invoices, purchase orders and related documents from their desktop computers and
can significantly reduce the number of costly paper-based steps.
The growth of the market for document image processing systems is being
driven by: (i) the improved price/performance characteristics of client/server
distributed computing systems, which have provided increased computing power at
the desktop and higher bandwidth LANs and WANs; (ii) the widespread deployment
of client/server computing systems connected to an infrastructure of LANs and
WANs; and (iii) the increased competitive pressures for businesses to improve
productivity and reduce costs, especially in paper-intensive industries. The
production segment of the document imaging market includes applications that
handle large volumes of paper and perform structured business functions such as
patient records management, insurance claims processing, loan processing and
accounts payable processing. According to a study by BIS Strategic Decisions,
the software component of the North American production imaging segment has
grown from approximately $264 million in 1993 to approximately $366 million in
1995 and is projected to grow to approximately $682 million by 1998.
The Evolution of Document Imaging Technology and Systems
The first generation of document image processing systems was introduced in
the mid-1980s. The hardware components of these systems included optical
scanners, optical disks and digital compression technologies which provided the
technological foundation for processing and managing paper documents in image
form. These early systems employed proprietary minicomputer architectures and
closed, proprietary software, and were sold by direct sales organizations to
address high-end production applications. These systems generally required a
significant amount of custom integration before they could interface with the
customer's existing legacy systems. The first generation systems were typically
priced in excess of $1 million.
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Since the early 1990s, the market for enterprise-wide computing systems used
by large commercial organizations has undergone a significant transformation, as
advances in hardware, software and networking technologies have led to a shift
from mainframe and other host-based computer architectures, to networked,
client/server architectures in which computing tasks are distributed among
numerous computers throughout the network. The flexibility, computing power and
cost-effectiveness of distributed processing in an open systems environment has
encouraged numerous large organizations to move many mission-critical computer
applications to client/server systems from mainframes. In particular, the
widespread adoption of client/server computing systems has significantly reduced
the investment required to install, implement and operate mission-critical
imaging and workflow applications. Most client/server production imaging systems
are currently based on UNIX operating systems; however, a 1996 study by
International Data Corporation predicts that while shipments of UNIX servers
will grow from 462,000 in 1994 to 766,000 in 1998, a 13% annual growth rate,
shipments of Windows NT servers will grow from 115,000 in 1994 to 1,170,000 in
1998, a 79% annual growth rate, challenging UNIX as the leading server software.
Windows NT operating systems are expected to experience significant growth due
to the large installed base of Windows NT-ready personal computers, its user
friendliness and its relatively low user cost compared to the cost of UNIX
systems. With the emergence of Windows NT-based operating systems, an
alternative technological infrastructure to UNIX is now in place to offer high
performance imaging systems using standard desktop hardware and software which
can be installed and integrated in weeks or months.
Certain challenges facing the healthcare industry illustrate the market
potential for client/server based imaging solutions. Competition and cost-
containment measures imposed by governmental and private payors have created
substantial pressures on healthcare providers to control healthcare costs while
providing quality patient care. At the same time, the healthcare delivery system
is experiencing a shift from a highly fragmented group of non-allied healthcare
providers to integrated delivery networks which combine payors, hospitals and
outpatient facilities. These integrated delivery networks are better suited to
improve care and enhance operating efficiencies in the increasingly competitive
healthcare environment. Traditional healthcare information systems are limited
because (i) they do not capture paper-based records which are stored in various
sites throughout the enterprise, and (ii) they cannot access medical images such
as X-rays and CAT scans at the point of care. In order to address these
concerns, hospitals and other healthcare providers are demanding comprehensive,
cost-effective information systems that deliver rapid access to a fully updated
and complete computer-based patient record ("CPR"). While HCIS vendors have made
progress integrating many of the components necessary to construct a CPR, a
complete CPR must also contain all current and historical patient information,
and information generated and stored outside of the local computer network.
Document imaging and COLD technologies are essential elements of a CPR because
they allow paper-based documents, computer generated information and medical
images to be stored, accessed and delivered to the provider at the point of
patient care. Hospitals and other healthcare providers are increasingly seeking
integrated imaging systems with a standards-based architecture and custom
interfaces designed to accept current medical interface formats to increase
productivity, reduce costs of administration and increase cash flow.
Other paper intensive industries face cost containment and productivity
challenges similar to those confronting the healthcare industry. An increasing
number of companies in these industries are seeking cost-effective image
processing solutions that leverage their existing technological investments.
The Optika Solution
Optika has developed the FilePower Suite of integrated client/server imaging
software, which is comprised of: server software, providing core imaging
functions; application software for document image management; COLD; automated
workflow transaction processing;, and associated development tools. The Company
believes that the FilePower Suite enables end-users to reduce costs, improve
operational productivity and enhance customer service. The Company's integrated
software combines image management, COLD and advanced workflow processing into a
single, component-based application. The FilePower Suite is designed to provide
the following key benefits:
Rapid Installation and Ease of Use. The FilePower Suite is contained on a
single compact disk ("CD") which includes on-line documentation and on-line
help, and is designed for push-button installation and rapid integration into
the end-user's existing information system. The Company's products offer a
convenient user interface so that
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users can move easily between imaging, COLD and workflow applications as well as
other graphical applications. The FilePower Suite uses common viewing technology
for the integrated products that allows end-users to work with a common
environment to manage all of the folder-based data in the imaging and COLD
systems. Standard programming languages can be used to integrate existing
information systems and other management information technologies with the
FilePower Suite.
Enterprise-Wide Scalability. The Company's products can be deployed via LANs
and WANs, and are designed for enterprise-wide scalability throughout large
organizations. Thus, organizations can deploy solutions that meet the needs of
workgroups and departments, and can later scale across an entire enterprise.
Small workgroups can take advantage of enterprise functionality such as volume
input and storage, disaster recovery, and security, while large enterprises can
implement systems based on departmental return on investment calculations.
Compatibility with Heterogeneous Computing Environments. Since inception,
the Company's products have been designed to operate on Windows-based platforms.
The Company's software products currently operate on a variety of open computing
platforms, including Windows 3.x, Windows 95 and Windows NT on the client
desktop, Windows NT and Novell Netware as servers, and UNIX for SQL database
support. The Company's products also operate on many common hardware, software
and database platforms, including SQL databases from Oracle, Sybase, Informix
and Microsoft. Because different types of data can be accessed from a variety of
platforms without the need for reformatting, the Company's products can be
deployed in an enterprise with heterogeneous platforms, without the need to
restructure the organization's existing computing environment.
Ease of Customization and Extension. The open client/server architecture of
the Company's products enables end-users to customize the software for industry-
specific, vertical applications, which can then be integrated into existing
computing environments through a custom user interface. The Company's network of
Business Solutions Partners ("BSPs") and Original Equipment Manufacturers
("OEMs") are able to build industry-specific, customized applications, which
interoperate with the Company's open, component-based software using Microsoft's
Object Linking and Embedding ("OLE") and Open Database Connectivity standards.
The FPhealthcare Suite is an example of a customized application being developed
by the Company, based on the FilePower Suite.
The Company believes it is one of the leading providers of imaging solutions
to the healthcare industry. Revenues from the healthcare industry comprised
approximately 13% of the Company's total revenues during 1996. The Company is
seeking to capitalize on the installed base of over 125 installations of the
FilePower Suite in the healthcare industry through the development of the
FPhealthcare Suite. The FPhealthcare Suite is designed to (i) capture and store
electronic data from disparate hospital information systems through real-time,
computerized interfaces; (ii) provide applications for efficiently scanning and
automatically indexing paper-based records; (iii) facilitate the storage of
digitized medical images such as X-rays and CAT scans; (iv) allow storage of a
patient's lifetime medical record on low cost optical disks; (v) enable workflow
re-engineering of business processes; and (vi) incorporate user-oriented
interfaces that allow the provider to easily locate and retrieve patient
information in the hospital or clinical setting.
The following are examples of customer applications using the Company's
products. The benefits achieved by the following end-users may not necessarily
be achieved by every end-user.
Healthcare: A 500-bed hospital with two facilities in Kentucky was
experiencing significant growth in out-patient volumes and associated billing
and cash collection processing, and wanted an imaging solution that would
streamline the patient accounting and medical records functions and ultimately
allow for the creation of a complete CPR. In conjunction with one of its BSPs,
the Company installed the FilePower Suite and is currently in the process of
installing the FPhealthcare Suite at the end-user's site to provide medical
records and patient billing document storage, workflow processes for patient
billing and chart completion, auto-indexing of documents, bursting and filing of
reports from existing healthcare information systems and automated bulk
remittance processing. Four of the seven software modules included in the
FPhealthcare Suite have been installed and are currently operational at the end-
user's facilities.
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Financial Services: A leading financial services firm needed to automate its
post-loan closing process at one of its three U.S. service centers. Prior to the
installation for the FilePower Suite, this process consisted of 155 total steps,
22 of which were manual decisions and 109 of which were paper-based, including
mail, setup, audit, assignment, copying and filing. In conjunction with one of
its BSPs, Optika installed and integrated the FilePower Suite with the end-
user's existing legacy system in under 90 days. Following the installation of
the FilePower Suite, the number of paper-based steps and the total number of
steps were each reduced by over 50%, providing significant productivity
improvements. The Company has also installed the FilePower Suite at the end-
user's second U.S. service center and at an international service center.
Banking: A leading U.S. financial institution sought to improve the quality
of customer service provided by its Sioux Falls, South Dakota operations center,
which managed the customer service operations of 40 banks, and to reduce the
space required to store paper-based files such as account applications, power-
of-attorney, signature cards and correspondence. In conjunction with a local
BSP, the Company installed the FilePower Suite to enable customer service
employees at the operations center to store and retrieve customer information
formerly contained in paper-based files from their desktop computers. Following
the installation of the Company's software, the average time that a bank has had
to wait for information from the operations center has been reduced from an
average of 3.5 minutes to under one minute; hundreds of square feet of storage
space have been reduced to 40 square feet; and the end-user has been able to
reduce the number of customer service employees at the operations center by
approximately 30%.
Retail: A leading retailer with over 240 membership warehouses in the United
States, Canada, Mexico and the United Kingdom needed to reduce the paperwork
associated with its accounts payable processing system. The end-user expected
that, by 1996, in the absence of an imaging solution, accounting documents would
exceed 9 million pages per year. In conjunction with one of its BSPs, the
Company installed FPmulti and FPreport to provide the end-user with the ability
to assemble and access proof of shipment, purchase orders and invoices on-line,
resulting in cost savings in excess of $7 million over a five-year period, as
well as in improved customer service through faster and more reliable access to
documents.
Strategy
Optika's objective is to be the leading worldwide supplier of high-
performance client/server, integrated imaging software designed to meet the
needs of paper-intensive industries. The Company's strategy includes the
following key elements:
Extend Technology Leadership. The Company intends to extend its position as
a technology leader in developing and marketing open architecture,
client/server, integrated imaging, COLD and workflow software products. The
Company believes that Windows NT will continue to challenge UNIX as a leading
imaging and workflow server operating system over the next several years and
intends to maintain and extend its leadership position in developing imaging
software to support Windows NT operating environments. The Company plans to
introduce enhancements to its FilePower Suite and vertical market applications
which are complementary technologies and products both to enhance the features
and functionality of its existing products, and to add new products. The Company
has developed intranet and Internet applications for its imaging, COLD and
workflow technologies.
Continue to Develop Leveraged Distribution Model. The Company intends to
continue to strengthen its network of BSPs and OEMs in targeted domestic and
international markets. BSPs are an integral part of the Company's distribution
strategy because they are responsible for identifying potential end-users,
selling the Company's products to end-users as part of a complete hardware and
software solution, customizing and integrating the Company's products at the
end-user's site, and supporting the end-user following the sale. The Company's
strategy is to target its marketing activities toward its most productive BSPs
and recruit additional BSPs in key geographical and vertical markets. OEMs also
are an integral part of the Company's distribution strategy because they
generally have a higher sales volume and require considerably less post-sales
support than the Company's BSPs. The Company currently has OEM relationships
with, among others, Lanier Worldwide, Inc. ("Lanier"), Eclypsis
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(formerly Alltel Healthcare Information Services, Inc.) and Anacomp, Inc.
("Anacomp"), and is actively seeking to develop additional OEM relationships.
Focus on Scaleable Solutions. The Company has designed its products to scale
from workgroups and departments to large enterprises. The Company believes that
initial end-user success with its software is an essential factor in the end-
user's decision to deploy the software throughout the enterprise. The Company
believes that migrating end-users from initial departmental usage to enterprise-
wide deployment provides additional sales opportunities within its existing end-
user installed base.
Lower Cost of Ownership. The Company intends to continue to enable end-users
to leverage their investment in their existing infrastructure of heterogeneous
hardware, software and database systems through the open architecture of its
software products. The Company believes that end-users, BSPs and OEMs can reduce
programming costs by using Optika's application programming interface ("API") or
by employing the integration methods in OLE. Because the Company's products can
be initially deployed at the workgroup level, end-users can deploy a limited
number of copies of Optika's software as required to meet their immediate needs,
and then receive preferential pricing as they scale to a larger number of users.
Capitalize on Healthcare Opportunity. Due to the size of the FilePower
Suite's installed base in the healthcare industry, the Company formed a
dedicated Healthcare Division in August 1994 to develop and market the
FPhealthcare Suite as a comprehensive software solution tailored to this
industry. Key elements of the Company's healthcare strategy include: completing
the development of the FPhealthcare Suite; recruiting additional BSPs, OEMs and
sales and marketing personnel focused on healthcare; and expanding sales of its
imaging products to other healthcare organizations, including health maintenance
organizations and home healthcare providers. The Company intends to develop
additional applications for other vertical markets, such as retail, in the
future.
Products
The Company's core products are (i) the FilePower Suite, a suite of high-
performance, client/server, integrated imaging software products that perform
all five basic imaging functions, and (ii) the FPhealthcare Suite, a suite of
integrated document imaging and computer report processing applications for
managing medical records and business office applications. The Company's
products run on a variety of open computing platforms, support standard
graphical operating systems, and can be deployed across enterprises through LANs
and WANs.
FilePower Suite
In August 1995, the Company released the FilePower Suite on a single, easy-
to-use CD which simplifies system installation and configuration. The FilePower
Suite consists of a client domain, development tools, and a server domain. The
client domain includes document image management, COLD and workflow software
applications, while the server domain provides an extensive set of core imaging
services. API development tools included on the CD enable third-party developers
to build a variety of applications tailored to specific industries. Electronic
business documents and COLD pages can be stored in folders along with document
images, which are managed by the FilePower server software. The FilePower Suite
allows users to view and manipulate many disparate document types without
launching separate applications.
Client Domain
FPmulti. FPmulti, the Company's image management product, provides a
comprehensive solution for managing scanned images of paper documents,
facsimiles and computer-generated reports, as well as data files created by
common Windows-based application software. FPmulti accesses the tools necessary
to capture, view, file, store, retrieve, share, print and fax documents. FPmulti
utilizes industry-standard SQL databases to manage the index information for
scanned documents, computer reports, and electronic files created by other
office applications.
FPreport. FPreport, the Company's COLD product, is an information solution
for the capture, optical storage, management and retrieval of mainframe and
minicomputer generated reports as an alternative to a paper or COM
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(computer output to microfilm/fiche). FPreport captures computer data from
mainframes, minicomputers and personal workstations, to be formatted, indexed,
compressed and stored on optical disk. It also provides users with an interface
for designing and selecting the fields that will be indexed for future retrieval
needs. FPreport is able to store hundreds of thousands or millions of computer
report pages on an optical disk, using compression techniques.
PowerFlow. PowerFlow is the automated transaction processing system that
provides independent workflow services, process-based and ad hoc routing, and a
platform for integrating third-party applications and data into the workflow
process. All management and administration for the system (for example,
designing workflow process maps and producing management reports) is
accomplished graphically and without programming or scripting. The resulting
process definitions are used as an electronic "road map" for automatically
routing documents, initiating task assignments and triggering automated
processes such as printing, faxing or updating. In addition, an administration
tool allows supervisory personnel to monitor and manage work processes and
resources on a continuous basis.
FPworkBooks and FPwebBooks. Optika FPworkBooks enables copies of documents
stored in a FilePower application to be placed in a "container" that can be e-
mailed via Lotus Notes, Microsoft Exchange, corporate e-mail systems and similar
systems throughout the enterprise. FPwebBooks, the Company's first product
developed for intranets and the Internet, utilizes FPworkBooks technology to
allow users to collect information from an Optika system, encrypt it, and
transmit it over intranets and the Internet with a high level of security.
Development Tools and Connectivity
FilePower integration and development tools include a set of APIs and an OLE
automation and control layer (collectively, "FPengine"). FPengine consists of a
powerful collection of advanced functions designed to simplify the complexity of
image-enabling, including optical disk management, OCR, full text indexing,
high-speed image printing and faxing, and image display and manipulation.
FPengine provides a comprehensive solution for integrating imaging, COLD and
workflow functionality with most existing applications. FPengine can be used by
third-party developers with standard development tools including Visual Basic,
C/C++ and PowerBuilder and other programming environments to image-enable legacy
applications and to invent custom document imaging solutions, or create value
added enhancements to the core FilePower family of products by integrating other
information management technologies.
Server Software Domain
The server software included in the FilePower Suite provides a number of core
image management functions. FPdisc facilitates the retrieval and storage of
documents and images. The FPdisc Server acts as the system's storage for data
files, documents, computer reports and images. FPdisc Server is the foundation
of the Optika image and work management systems, and supports numerous high-
capacity storage subsystems such as optical media and CD-ROM. FPprint and FPfax
provide hard-copy replication, electronic transmission and reception of
documents and images. FPenhance improves the quality of scanned images by
applying complex mathematical algorithms to the image. These enhancement
functions serve to improve the shape and readability of the characters on the
scanned image, resulting in higher accuracy for the optical character
recognition process performed by the FilePower Optical Character Recognition
Server ("FPocr"). The FilePower Transaction Processing Systems ("FPtransact")
are companion servers that perform batch processing of work generated by
external systems. The FPtransact product line includes batch processing
capabilities for FPmulti and PowerFlow, and the SQL database structures for
FPmulti and PowerFlow.
FPhealthcare Suite
The Company is currently developing the FPhealthcare Suite, an integrated
patient accounting and medical records software suite designed to enable
hospitals and other healthcare organizations to manage large amounts of patient
related documents. The FPhealthcare Suite, which utilizes the FilePower server
software and associated development tools, is designed to provide fast and
efficient access to patient information from workstations located throughout the
enterprise, including the point of patient care. The FPhealthcare Suite
integrates and improves on the traditional paper-handling associated with
patient care, and is designed to address initial patient scheduling, in-
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patient, out-patient or emergency department treatment, medical chart
completion, billing, follow-up and remittance posting. The FPhealthcare Suite
will integrate with HCIS systems to automatically establish computer-based
patient records. Additionally, the FPhealthcare Suite will provide a customized
medical viewer and configurable workflow processes. To date, five of the seven
software modules currently comprising the FPhealthcare Suite have been
developed, and the remaining two modules are under development and are currently
expected to be completed by mid-1997. In addition, an eighth module will be
added to the FPhealthcare Suite, and is also expected to be delivered by late
1997. The Company may add additional software modules to extend the
functionality of the FPhealthcare Suite. The Company has formed an advisory
council of current and potential end-users of the FPhealthcare Suite to enable
it to meet industry-wide requirements. See "Business Risks--Risks Associated
with the FPhealthcare Suite."
The following are key aspects of the FPhealthcare Suite:
MPregister. MPregister uses pen-pads and low-cost desktop scanners at the
registration desks to reduce or eliminate the creation of paper at the time of
patient registration. Patients review, complete and electronically sign various
forms which are then automatically placed in the patient's electronic folder.
MPviewer. MPviewer is the fundamental interactive viewing tool for medical
charts, folders and records in the business office. It is used throughout the
FPhealthcare Suite and displays scanned documents, medical images, formatted
pages from downloaded computer reports, and most word processing, spreadsheet
and other personal computer-type files. MPviewer features folder-style tabs to
access documents within sections of a chart or billing folder, and can be
personalized for individual users.
MPchart. MPchart combines sophisticated rule-based workflow with a simple
graphical interface for chart completion and enables doctors or other authorized
personnel to electronically sign individual documents. MPchart supports
assignment and re-analysis of deficiencies and interfaces with the hospital's
existing third-party deficiency tracking software, to form a secure,
comprehensive and versatile completion system.
MPbridge. MPbridge uses the healthcare industry's "HL-7" communication
standard to interface with the hospital's admission, discharge and transfer
system for automatic folder creation/maintenance, as well as automatic retrieval
of documents from prior visits into high speed magnetic disk cache.
MPindex. MPindex is a configurable, extensible workflow system for scanning,
auto-indexing and filing all types of medical records, financial documents and
correspondence. It combines technologies such as image enhancement, bar-code
recognition, OCR and mark sense with a streamlined user interface for document
quality control, exception handling and re-scanning.
MPacquire. MPacquire, which is currently under development, is a family of
servers that capture, process and import documents created by other data
processing systems within the hospital. Transcriptions, lab reports, bills and
other documents can be filed electronically without the need for scanning paper.
MPremit. MPremit, which is currently under development, is an automated
system for the scanning and processing of bulk remittances. MPremit applies
business rules based on the hospital and the specific payor to calculate payment
and adjustment amounts, and posts these transactions to the hospital's financial
system.
Sales and Marketing
Sales
Optika employs a two-tiered leveraged sales model consisting of a worldwide
network of approximately 212 BSPs and eight OEMs. Optika also has a Major
Accounts team which supports its BSPs. Sales from BSPs and OEMs accounted for
89% and 11%, respectively, of the Company's revenues for the years ended
December 31, 1996 and December 31, 1995. (See "Business Risks--Reliance on
Indirect Distribution Channels; Potential for Channel Conflict.")
10
Business Solutions Partners. Business Solutions Partners or BSPs are VARs
responsible for identifying potential end-users, selling the Company's products
to the end-users as part of a complete hardware and software solution,
customizing and integrating the Company's products at the end-users sites, and
providing support and maintenance to the end-users following the sale. The
Company's BSPs currently include large organizations selling a wide variety of
products, smaller organizations focused on imaging, application-oriented
organizations, and geographically-focused organizations. The Company establishes
relationships with BSPs through written agreements which establish a price at
which the BSP is eligible to purchase the Company's software for resale to end-
users, the maintenance fee revenues which must be remitted back to the Company,
and other material terms and conditions. Such agreements generally do not grant
exclusivity to the BSPs, do not prevent the BSPs from carrying competing product
lines and do not require the BSPs to sell any particular dollar amount of the
Company's software, although the contracts may be terminated at the election of
the Company if specified sales targets and end-user satisfaction goals are not
attained. Actual sales contracts are between the BSPs and the end-users,
although the end-user directly licenses the software from the Company through
acceptance of a standard shrink-wrapped license agreement. The BSPs remit the
proceeds of software sales and maintenance fees directly to the Company
following the sale to the end-user. The Company supports its BSPs through
dedicated personnel at its headquarters in Colorado Springs and a network of
eleven field offices. Services range from joint marketing efforts to assistance
with pricing and proposals to technical product support.
The Company's strategy is to target its marketing activities toward its most
productive BSPs and to recruit additional BSPs in key geographical and vertical
markets. The Company's "Eye on Partnership" and "Affiliate Company" programs are
crucial elements of this strategy. The Eye on Partnership program is designed to
promote long-term relationships between the Company and its BSPs by awarding
silver, gold and platinum status to BSPs, based on their sales, training and
customer service achievements. This program includes extended support and free
training, as well as marketing assistance with seminars, programs and co-op
marketing funds. The Affiliate Company program is designed to create a
partnership between the Company and its most productive BSPs, and to provide
additional incentives to encourage them to promote the Company's products.
Affiliate Companies agree not to carry competing products and receive
territorial rights (although not exclusivity), concentrated marketing efforts
from the Company, and additional support from the Company's Major Accounts team.
OEMs. The Company has also established relationships with eight OEMs who
resell the Company's software under their names to their end-user customers as
part of their own imaging software solution. Unlike the Company's BSP
relationships, the OEMs actively compete with the Company and its BSPs. The
Company's current OEM relationships include Lanier (imaging and COLD), Eclypsis
(healthcare) and Anacomp (COLD). Optika's OEM agreements establish a price at
which the OEM is eligible to purchase the Company's software for resale to its
customers, and the maintenance fees received by the OEM to be remitted back to
Optika. OEMs generally have a higher sales volume and require considerably less
post-sale support than the Company's BSPs. The Company's strategy is to continue
to recruit OEMs in key vertical markets such as healthcare and financial
services.
Major Accounts. The Company's Major Accounts team focuses on developing
relationships with large corporate end-users with multiple geographic locations.
The Major Accounts team initiates contact directly with the end-user, but relies
heavily on the Company's BSPs to provide installation and integration services
at the end-user's site and provide end-user support and maintenance following
sales. For sales originated by the Major Accounts team, the end-user enters into
a contract directly with the Company, and the Company sub-contracts and
coordinates installation and support activities with the BSPs.
International Sales
The Company believes that a significant opportunity exists to increase
international sales of its integrated imaging software products. For the years
ended December 31, 1995 and 1996, Optika generated approximately 15% and 29%,
respectively, of its total revenues from international sales. The Company
currently maintains an office in London to support its 29 European BSPs, and
offices in Singapore, Hong Kong, Malaysia and Australia to support its 26 Asian
BSPs. The Company is actively seeking to expand and strengthen its network of
foreign BSPs,
11
particularly in Japan and Latin America. The Company is also recruiting BSPs in
Canada, continental Europe and Latin America. See "Business Risks--International
Operations."
Marketing
In support of its sales efforts, the Company conducts sales training courses,
and targeted marketing programs that include direct mail, channel marketing,
promotions, seminars, trade shows, telemarketing and ongoing customer and third-
party communication programs. The Company also seeks to stimulate interest in
its products through its public relations program, speaking engagements, white
papers, technical notes and through programs targeted at educating consultants
on the Company's capabilities. As part of its public relations program, Optika
has deployed a multimedia CD-ROM. This CD contains product demonstrations,
Company highlights, marketing materials and video clips of customer
testimonials. Optika's marketing CD is used as a fulfillment piece for direct
mail and seminars, as well as an educational tool for industry analysts. Optika
is also entering into, or expanding corporate relationships with major
technology, database, application and hardware companies, such as Microsoft;
Cornerstone Imaging, Inc.; Kofax Image Products, Inc.; and PC DOCS Group
International, Inc. to improve the Company's position in the market.
Customers
The Company's direct customers are its BSPs and OEMs, which purchase and
resell its products to its indirect customers, the end-users. As of December 31,
1996, the Company had licensed approximately 37,000 seats to its end-users
worldwide. No BSP, OEM or end-user accounted for more than 10% of the Company's
total revenues for the year ended December 31, 1996. Set forth below is a
partial list of end-users who have generated revenues for the Company since
January 1, 1996 and have acquired licenses for a minimum of five users. The
Company believes that these end-users are currently using the Company's products
and are representative of the Company's overall end-user base.
Healthcare Government
- ---------- ----------
Geisinger Clinic Washington State Patrol
Emanuel Medical Center Mississippi Public Employees Retirement System
Alexian Brothers Hospital State of Washington-Office of Financial Management
Colorado Department of Human Services
Financial & Banking
- ------------------- Manufacturing
The CIT Group -------------
Bank of Nova Scotia - NY Navistar
First Chicago National Bank Boart Longyear
Nations Bank H.K. Michelin
Siemens Credit Corporation Starcraft
Equifax
Retail
Insurance ------
- --------- J. Crew
Colorado Farm Bureau Speigel
Colonial Penn Life Insurance Payless Cashways
Vela Insurance Services Western Auto
Communications Transportation
- -------------- --------------
Ackerley Communications Fritz Companies
Telephone Express DHL
Telecomunicacaoes de SP -
Brazil Utilities
Unique Air Ltd. ---------
Intermountain Rural Electric Association
Education Hong Kong Gas
- --------- Orlando Utilities Commission
University of Colorado Louisville Gas & Electric Company
University of Nebraska
12
Florida Community College
at Jacksonville
Washington University
John Marshall Law School
13
Service and Support
The Company believes that a high level of service and support is critical to
the Company's performance. The Company provides technical support, maintenance,
training and consulting to its BSPs, which are in turn primarily responsible for
providing technical support services directly to the end-users. The Company also
provides such support directly to its end-users on an as-needed basis. These
services are designed to increase end-user satisfaction, provide feedback to the
Company as to end-users' demands and requirements, and generate recurring
revenue. The Company plans to continue to expand its services and support
programs as the depth and breadth of the products offered by the Company
increases.
BSP Support
The Company maintains pre-sales technical support personnel that work
directly with the BSPs to provide technical responses to sales inquiries. The
Company offers educational and training programs, as well as customized
consulting services, to its BSPs. Fees for training and consulting services are
generally charged on a per diem basis. The Company also provides product
information bulletins on an ongoing basis, including bulletins posted through
its Internet web site, its Lotus Notes database, and through periodic
informational updates about the products installed. These bulletins generally
answer commonly asked questions and provide information about new product
features.
Technical Support and Software Maintenance
The Company, in conjunction with its BSPs, offers end-users a software
maintenance program. The maintenance program includes software updates provided
by the Company to the end-user, and technical support provided by the BSP.
Telephone consultation is provided by the Company to the BSP to respond to end-
user technical questions that the BSP is unable to answer. A BSP typically
charges the end-user a fee for maintenance and support of the entire imaging
systems, including software and hardware. In turn, the Company, on an annual
basis, charges the BSP a fee of between 8% and 12% of the then-current list
prices of the licensed software.
Warranty
The Company generally includes a 90-day limited warranty with the software
license. During the warranty period, the end-user is entitled to free product
upgrades and corrections for documented program errors, and the BSP is entitled
to free telephone consultation. The services and upgrades provided during the
warranty period may be extended by the end-user if they enter into the software
maintenance program.
Research and Development
The Company has committed, and expects to continue to commit, substantial
resources to research and development. Optika's research and development
organization is organized along the product team concept. Each product team has
an engineering team leader, a product manager, development engineers and quality
assurance engineers. The team is entirely responsible for the design,
implementation and quality of its products. Additionally, Optika has employed a
"product author" concept, under which individual contributors, or small teams,
develop products from conception to market introduction, with limited corporate
interference. Product authors are responsible for end-user satisfaction with the
products, and are compensated based on a percentage of the revenues generated by
the product. Product authorship encourages innovation, faster time to market,
higher quality and long-term employment relationships between the Company and
its most valued engineers. Product development efforts are directed at
increasing product functionality, improving product performance, and expanding
the capabilities of the products to interoperate with third-party software and
hardware. In particular, the Company is devoting substantial development
resources to develop additional functionality for its products, and the
capability to support additional platforms, databases, graphical user
interfaces, toolsets and emerging technologies. The Company believes that the
modular architecture of its software products will provide the foundation for
future enhancements to the Company's integrated imaging solution.
Areas of future development currently being pursued by the Company include
completing the development of two software modules of the FPhealthcare Suite,
and further enhancing the FilePower Suite. The Company continues
14
to identify and prioritize various technologies for potential future product
offerings. The Company may develop these products internally or enter into
arrangements to license or acquire products or technologies from third parties.
As of December 31, 1996, the Company's research and development organization
consisted of 43 full-time employees in Colorado Springs, Colorado, and nine
employees in Marlboro, Massachusetts. During 1996, research and development
expenses were $4.6 million. As of December 31, 1996, the Company had expensed
all of its software development costs as incurred. (See "Business Risks--Rapid
Technological Change; Dependence on New Product Development.")
Competition
The market for the Company's products is intensely competitive and can be
significantly affected by new product introductions and other market activities
of industry participants. The Company believes that the principal competitive
factors affecting its market include product features such as adaptability,
scalability, ability to integrate with third-party products, functionality, ease
of use, product reputation, quality, performance, price, customer service and
support, effectiveness of sales and marketing efforts, and company reputation.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors. The Company's
principal direct competitors for its various product lines include BancTec,
Inc., FileNet Corporation, International Business Machines Corporation, Unisys
Corporation, Mosaix, Inc. (formerly Viewstar Corporation) and Eastman Kodak
Company. The Company also competes with industry-specific application vendors
such as IMNET Systems, Inc. and LanVision Systems, Inc. Numerous other software
vendors also compete in each product area. Potential competitors include,
without limitation, providers of document management software products,
providers of document archiving products, and RDBMS vendors. Many of the
Company's current and potential competitors have longer operating histories,
significantly greater resources and name recognition, and a larger installed
base of customers than the Company. As a result, these competitors may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products, than can the Company. The Company also faces indirect
competition from VARs, OEMs, distributors and system integrators. The Company
relies on a number of these resellers for implementation and other customer
support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close relationships with these resellers, many of these third parties have
similar, and often more established, relationships with the Company's principal
competitors. If the Company is unable to develop and retain effective, long-term
relationships with these resellers, the Company's competitive position would be
materially adversely affected. Further, there can be no assurance that these
third parties, many of which have significantly greater resources than the
Company, will not market software products in competition with the Company in
the future or will not otherwise reduce or discontinue their relationships with
or support of the Company and its products. (See "Business Risks--Intense
Competition.")
Proprietary Rights
The Company relies on a combination of trade secret, copyright and trademark
laws, software licenses and nondisclosure agreements, to establish and protect
its proprietary rights in its products. The Company enters into confidentiality
and/or license agreements with all of its employees and distributors, as well as
with its customers and potential customers seeking proprietary information, and
limits access to and distribution of, its software, documentation and other
proprietary information. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
has certain registered and other trademarks. The Company believes that its
products, trademarks and other proprietary rights do not infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future. (See "Business
Risks--Dependence on Proprietary Technologies; Risk of Infringement.")
Employees
At December 31, 1996, the Company had 142 full-time employees in 12 cities.
Of these employees, 52 were involved in research and development, 48 in sales
and marketing, 27 in technical support and training, and 15 in
15
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationship with its
employees is good.
Executive Officers
The Company's executive officers and key employees, and their ages as of
March 10, 1997, are:
Name Age Position
---- --- ----------------------------------------------
Mark K. Ruport............ 44 President, Chief Executive Officer and
Chairman of the Board of Directors
Steven M. Johnson......... 35 Vice President-Finance and Administration,
Chief Financial Officer and Secretary
Marc R. Fey............... 41 Senior Vice President-Engineering and
Customer Support Services
David J. Mansen........... 42 Vice President-Marketing
Mark A. Schenecker........ 36 Vice President-Research and Development
Michael J. Cataldo........ 35 Vice President-Sales & Marketing Healthcare
Division
Paul Carter............... 42 Co-Founder and Director
Malcolm D. Thomson........ 35 Co-Founder and Director
Mark K. Ruport has been President and Chief Executive Officer and a Director
of the Company since February 1995. He has served as Chairman of the Board of
Directors since May 1996. From June 1990 to July 1994, Mr. Ruport was President
and Chief Operating Officer, and most recently Chief Executive Officer, of
Interleaf, Inc., a publicly-held software and services company that develops and
markets document management, distribution and related software. From July 1994
to February 1995, Mr. Ruport pursued personal interests. From 1989 to 1990, Mr.
Ruport was Senior Vice President of Worldwide Sales of Informix Software, where
he had responsibility for direct and indirect sales and OEMs. From 1985 to 1989,
Mr. Ruport was Vice President of North American Operations for Cullinet
Software, where he oversaw North American sales, customer support and systems
integration.
Steven M. Johnson has served as Vice President--Finance and Administration
and Chief Financial Officer of the Company since September 1992, and as its
Secretary since May 1996. He also served as interim Chief Executive Officer of
the Company from October 1994 to February 1995. Prior to joining the Company,
from February 1988 to September 1992, Mr. Johnson was Vice President, Finance,
and Chief Financial Officer, of Insurance Auto Auctions, Inc., a publicly held
company. From June 1987 to February 1988, Mr. Johnson served as Controller and
Director of Finance for HOH Water Technology Corporation; and prior to 1987, he
was a senior accountant with KPMG Peat Marwick.
Marc R. Fey has served as the Company's Senior Vice President--Engineering
and Customer Support Services since February 1996. Mr. Fey previously held the
position of Vice President--Development from July 1994 to February 1996. Prior
to joining the Company, from September 1991 to June 1994, Mr. Fey was President
of The Fey Company, which provided consulting services for software companies
and venture investors on technology, acquisitions, strategic planning and
general operations. Mr. Fey co-founded XA Systems Corporation, where from 1982
to 1991 he served in various capacities, including President, and most recently,
Chairman and Chief Technology Officer. Prior to 1982, Mr. Fey was a manager with
Andersen Consulting.
Michael J. Cataldo has served as Vice President--Sales and Marketing for the
Company's Health Care Division since October 1996. From July 1996 through
September 1996, Mr. Cataldo was a consultant for Software Technologies
Corporation and TradeWave Corporation. From July 1994 to June 1996, Mr. Cataldo
was employed by Software Technologies Corporation and held positions as Vice
President of World Wide Marketing and Vice President of Sales and Marketing for
North America. From 1988 to 1994, Mr. Cataldo was employed by HBO & Company
where he held positions as Business Unit Manager, Business Planner and Area
Manager. From 1986 to
16
1988, he was a Marketing Representative with Shared Medical Systems; and from
1984 to 1986, he progressed to District Sales Manager with Cable & Wireless Co.
in Vienna, Virginia.
David J. Mansen has served as Vice President--Marketing for the Company since
October 1995. From July 1991 to October 1995, Mr. Mansen was employed by
Recognition International, Inc., a provider of image processing systems, most
recently as Vice President of Marketing. From 1986 to 1991, Mr. Mansen was a
principal in a technology investment management firm; and from 1978 to 1985, he
held marketing positions at Datapoint Corporation.
Mark A. Schenecker has served as the Company's Vice President--Research and
Development since February 1996. Mr. Schenecker held the position of Director of
Product Management from August 1995 to January 1996, and Product Manager from
March 1994 to July 1995. Prior to joining the Company, Mr. Schenecker was
employed by Lanier Worldwide, Inc., where he held positions in systems analysis
and was responsible for advanced digital imaging and copier technology.
Paul Carter is a co-founder of the Company and has served as a Director since
its inception. Since July 1994, he has served as Chief Product Architect, and he
served as the Company's Secretary from 1988 to May 1996. From July 1990 to June
1994, Mr. Carter was Director of Research and Development of the Company, and
from January 1988 to June 1990 he was its Vice President--Research and
Development. Prior to co-founding the Company, Mr. Carter was a design
specialist for Ashton-Tate in California.
Malcolm D. Thomson is a co-founder of the Company and has served as a
Director since its inception. Since January 1996, he has served as Vice
President--Internet and Interconnectivity of the Company. From July 1994 through
December 1995, he served as Vice President--New Business Development; from
February 1993 through June 1994, he served as Vice President--Development; from
August 1992 through January 1993, he served as Vice President--Sales; from July
1990 through July 1992, he served as Director of Systems Integration; and from
the inception of the Company through June 1990, he served as President. Prior to
co-founding the Company, Mr. Thomson was an engineer with Ashton-Tate in the
United Kingdom and in California.
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K.
History of Losses: Accumulated Deficit: Future Results of Operations
Uncertain. The Company was founded in January 1988 and did not ship an
integrated version of the FilePower Suite until the third quarter of 1995.
Since its inception, the Company has incurred substantial costs to develop and
improve its software products; to establish sales, marketing and distribution
channels; and to recruit and train its employees. As a consequence, the Company
has incurred net losses in three of its past six fiscal years. In addition, the
Company experienced virtually no revenue growth between 1993 and 1995. As of
December 31, 1996, the Company had an accumulated deficit of approximately
$859,000. There can be no assurance that the Company will achieve revenue
growth or will be profitable on a quarterly or annual basis.
Dependence on Windows NT. The Company is largely dependent on the
development and growth in the market for Windows NT operating systems and the
migration of imaging and workflow server software to such operating systems.
There can be no assurance that this market will grow or that the Company will be
able to respond effectively to the evolving requirements of this market. UNIX-
based operating systems currently account for most client/server-based
production imaging operating systems, and the Company's software interoperates
with UNIX-based operating systems to only a very limited extent. There can be
no assurance that UNIX will not continue to be the dominant operating platform
in the future or that the introduction of other operating systems will not
adversely affect the deployment of Windows NT. The failure of Windows NT
operating systems to achieve market acceptance over the next several years would
have a material adverse effect on the Company's business, results of operations,
17
and financial condition. In addition, certain performance characteristics of
the Company's products are currently limited by the Windows NT architecture,
including the ability to be deployed throughout the largest enterprises.
Significant Fluctuations in Operating Results. The Company's sales and other
operating results have varied significantly in the past and will vary
significantly in the future as a result of factors such as: the size and timing
of significant orders and their fulfillment; demand for the Company's products;
changes in pricing policies by the Company or its competitors; the number,
timing and significance of product enhancements and new product announcements by
the Company and its competitors; changes in the level of operating expenses;
customer order deferrals in anticipation of new products or otherwise; foreign
currency exchange rates; warranty and customer support expenses; changes in its
end-users' financial condition and budgetary processes; changes in the Company's
sales, marketing and distribution channels; delays or deferrals of customer
implementation; product life cycles; software bugs and other product quality
problems; discounts; the cancellation of licenses during the warranty period or
nonrenewal of maintenance agreements; customization and integration problems
with the end-user's legacy system; changes in the Company's strategy; the level
of international expansion; and seasonal trends. A significant portion of the
Company's revenues has been, and the Company believes will continue to be,
derived from a limited number of orders, and the timing of such orders and their
fulfillment have caused, and are expected to continue to cause, material
fluctuations in the Company's operating results. Revenues are also difficult to
forecast because the markets for the Company's products are rapidly evolving,
and the sales cycle of the Company and of its BSPs and OEMs, from initial
evaluation to purchase, is lengthy and varies substantially from end-user to
end-user. To achieve its quarterly revenue objectives, the Company depends upon
obtaining orders in any given quarter for shipment in that quarter. Product
orders are typically shipped shortly after receipt; consequently, order backlog
at the beginning of any quarter has in the past represented only a small portion
of that quarter's revenues. Furthermore, the Company has often recognized most
of its revenues in the last month, or even in the last weeks or days, of a
quarter. Accordingly, a delay in shipment near the end of a particular quarter
may cause revenues in a particular quarter to fall significantly below the
Company's expectations and may materially adversely affect the Company's
operating results for such quarter. Conversely, to the extent that significant
revenues occur earlier than expected, operating results for subsequent quarters
may fail to keep pace with results of previous quarters or even decline. The
Company also has recorded generally lower sales in the first quarter than in the
immediately preceding quarter, as a result of, among other factors, end-users'
purchasing and budgeting practices and the Company's sales commission practices,
and the Company expects this pattern to continue in future years. To the extent
that future international operations constitute a higher percentage of total
revenues, the Company anticipates that it may also experience relatively weaker
demand in the third quarter as a result of reduced sales in Europe during the
summer months. A significant portion of the Company's expenses are relatively
fixed in the short term. Accordingly, if revenue levels fall below
expectations, operating results are likely to be disproportionately and
adversely affected. As a result of these and other factors, the Company
believes that its quarterly operating results will vary in the future, and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
Risks Associated with the FPhealthcare Suite. The Company's future
performance will depend in significant part upon its ability to complete the
development of, and achieve commercial acceptance for, the FPhealthcare Suite,
the Company's first software product tailored for an industry-specific
application. The FPhealthcare Suite is being developed in response to an order
by St. Elizabeth Medical Center ("SEMC"), and only a limited number of end-users
have purchased any of the software modules contained in this suite. To date,
five of the seven software modules currently comprising the FPhealthcare Suite
have been developed, and the remaining two modules are under development and are
currently expected to be completed in mid-1997 by the end of 1996. In
addition, an eighth module will be added to the FPhealthcare Suite and is
expected to be delivered to SEMC by late 1997. However, there can be no
assurances that any such modules can be completed in such time frame. Delays in
the completion of the remaining modules could occur due to a variety of factors
such as turnover among software engineers, software bugs or other product
quality problems. The Company may add additional software modules to extend the
functionality of the FPhealthcare Suite. Three of the developed modules have
been installed at SEMC's site. If the Company fails to complete the
FPhealthcare Suite to SEMC's satisfaction in a timely manner, the Company's
ability to market its
18
products to other prospective end-users in the healthcare industry would be
materially impaired and the Company's business, results of operations and
financial condition would be materially and adversely affected. The FPhealthcare
Suite has not achieved widespread customer acceptance; this acceptance will
depend, in part, on the Company's ability to complete and market this software
successfully. The failure of the Company to develop its distribution channel to
include healthcare sales expertise in a timely manner will negatively impact its
ability to gain broad acceptance in the healthcare market.
Reliance on Indirect Distribution Channels; Potential for Channel Conflict.
The Company's future results of operations will depend on the success of its
marketing and distribution strategy, which relies, to a significant degree, upon
BSPs and OEMs to sell and install the Company's software, and provide post-sales
support. In 1996, the Company's top 53 BSPs/OEMs accounted for approximately
80% of its revenues, and substantially all of the Company's total revenues were
derived from sales by BSPs and OEMs. These relationships are usually established
through formal agreements that generally do not grant exclusivity, do not
prevent the distributor from carrying competing product lines and do not require
the distributor to purchase any minimum dollar amount of the Company's software.
There can be no assurance that any BSPs will continue to represent the Company
or sell its products. Furthermore, there can be no assurance that other BSPs,
some of which have significantly greater financial marketing and other resources
than the Company, will not develop or market software products which compete
with the Company's products or will not otherwise discontinue their relationship
with, or support of, the Company. Some of the Company's BSPs are small companies
that have limited financial and other resources which could impair their ability
to pay the Company. To date, the Company's inability to receive payments from
such BSPs has not had a material adverse effect on the Company's business,
results of operations or financial condition. The Company's OEMs currently
compete with the Company and its BSPs. Selling through indirect channels may
also hinder the Company's ability to forecast sales accurately, evaluate
customer satisfaction, provide quality service and support or recognize emerging
customer requirements. The Company's strategy of marketing its products
indirectly through BSPs and OEMs may result in distribution channel conflicts.
To the extent that different BSPs and OEMs target the same customers, they may
come into conflict with each other. Although the Company has attempted to
allocate certain territories for its products among its distribution channels in
a manner to avoid potential conflicts, there can be no assurance that channel
conflict will not materially and adversely affect its relationship with existing
BSPs and OEMs, or adversely affect its ability to attract new BSPs and OEMs.
The loss by the Company of a number of its more significant BSPs or OEMs; the
inability of the Company to obtain qualified new BSPs or OEMs, or to obtain
access to the channels of distribution offering software products to the
Company's targeted markets; or the failure of BSPs or OEMs to pay the Company
for its software; could have a material adverse effect on the Company's
business, results of operations, or financial condition.
Rapid Technological Change: Dependence on New Product Development. The
market for imaging software is characterized by rapid technological change,
changes in customer requirements, frequent new product introductions and
enhancements, and emerging industry standards. The Company's future performance
will depend in significant part upon its ability to respond effectively to these
developments. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete,
unmarketable or noncompetitive. For example, new technologies based on the
Internet, such as Java, could alter generally accepted conventions for document
creation, distribution and management. However, the use of Internet protocols
for imaging applications is presently in the developmental stage, and the
Company is unable to predict the future impact of such protocols on the
Company's products. Moreover, the life cycles of the Company's products are
difficult to estimate. The Company's future performance will depend in
significant part upon its ability to enhance current products, and to develop
and introduce new products that respond to evolving customer requirements. The
Company has in the recent past experienced delays in the development and
commencement of commercial shipments of new products and enhancements, resulting
in customer frustration and delay or loss of revenues. The inability of the
Company, for technological or other reasons, to develop and introduce new
products or enhancements in a timely manner in response to changing customer
requirements, technological change or emerging industry standards, or maintain
compatibility with heterogeneous computing environments, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
19
Product Concentration; Dependence on Emerging Market for Integrated Imaging
Systems. To date, substantially all of the Company's revenues have been
attributable to sales of the FilePower Suite and individual software modules
which comprise the FilePower Suite and the FPhealthcare Suite. The Company
currently expects the FilePower and the FPhealthcare Suite to account for
substantially all of its future revenues. As a result, factors adversely
affecting the pricing of, or demand for, such products, such as competition or
technological change, could have a material adverse effect on the Company's
business, results of operations, and financial condition. The Company's future
financial performance will depend in general on growth in the relatively small
and emerging market for imaging software products, and in particular on the
successful development, introduction and customer acceptance of new and enhanced
versions of its existing software products such as the FilePower Suite, along
with the successful development, marketing and market acceptance of new
industry-specific products such as the FPhealthcare Suite. There can be no
assurance that such market will grow or that the Company will be successful in
developing and marketing these or any other products, or that any of these
products will achieve widespread customer acceptance. If the document imaging
software market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, results of operations, and financial
condition would be materially and adversely affected.
Lengthy and Complex Sales and Implementation Cycles; Dependence on Capital
Spending. The license of the Company's software products is typically an
executive-level decision by prospective end-users, and generally requires for
the Company and its BSPs and OEMs to engage in a lengthy and complex sales cycle
(typically between six and twelve months from the initial contact date). In
addition, the implementation by customers of the imaging products offered by the
Company may involve a significant commitment of resources by such customers over
an extended period of time. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
the Company has little or no control. The Company's future performance also
depends upon the capital expenditure budgets of its customers and the demand by
such customers for the Company's products. Certain industries to which the
Company sells its products, such as the financial services industry, are highly
cyclical. The Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of such industry patterns,
domestic and foreign economic and other conditions, and other factors affecting
capital spending. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Intense Competition. The market for the Company's products is intensely
competitive and can be significantly affected by new product introductions and
other market activities of industry participants. The Company's competitors
offer a variety of products and services to address the emerging market for
imaging software solutions. The Company's principal direct competitors include
BancTec, Inc., FileNet Corporation, International Business Machines Corporation,
Unisys Corporation, Mosaix, Inc. (formerly Viewstar Corporation) and Eastman
Kodak Company. The Company also competes with industry-specific application
vendors such as IMNET Systems, Inc. and LanVision Systems, Inc. Numerous other
software vendors also compete in each product area. Potential competitors
include providers of document management software, providers of document
archiving products and relational database management systems vendors. The
Company also faces competition from VARs, OEMs, distributors and systems
integrators, some of which are BSPs or OEMs for the Company.
Many of the Company's current and potential competitors are substantially
larger than the Company, have significantly greater financial, technical and
marketing resources, and have established more extensive channels of
distribution. As a result, such competitors may be able to respond more rapidly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than the Company. Because the Company's products are designed to
operate in non-proprietary computing environments and because of low barriers to
entry in the imaging software market, the Company expects additional competition
from established and emerging companies, as the market for integrated imaging
products continues to evolve. The Company expects its competitors to continue
to improve the performance of their current products and to introduce new
products or new technologies that provide added functionality and other
features. Successful new product introductions or enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's products and services, result in continued intense
price competition, or make the Company's products and services or technologies
obsolete or noncompetitive. To be competitive, the
20
Company will be required to continue to invest significant resources in research
and development, and in sales and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company will be able to make the technological advances necessary to be
competitive. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties,
to increase the ability of their products to address the needs of the Company's
prospective customers. In addition, several competitors have recently made, or
attempted to make, acquisitions to enter the market or increase their market
presence. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors, or that competitive pressures will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Risks Associated with Acquisitions. Optika has consummated several recent
acquisitions, including the acquisitions of TEAMWorks Technologies, Inc.
("TEAMWorks") in 1994 (the "TEAMWorks Acquisition"); and IPRS Asia (S) Pte Ltd.,
a Singapore company ("IPRS"), and Intuit Development Limited, a Hong Kong
company ("Intuit"), in 1995 (the "IPRS/Intuit Acquisition") (collectively, the
"Acquisitions"); and continues to evaluate potential acquisitions of businesses,
products and technologies. In 1995, the Company terminated all of the
operations of TEAMWorks due to the failure of the TEAMWorks products to achieve
market acceptance and the Company's lack of experience in selling such products.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies and products of the acquired companies,
potentially dilutive issuances of equity securities, accounting charges, debt
assumptions, operating companies in different geographic locations with
different cultures, the potential loss of key employees of the acquired company,
the diversion of management's attention from other business concerns and the
risks of entering markets in which the Company has no or limited direct prior
experience. There can be no assurance that suitable acquisition candidates will
be identified, that any acquisitions can be consummated or that any acquired
businesses or products can be successfully integrated into the Company's
operations. In addition, there can be no assurance that the Acquisitions or any
future acquisitions will not have a material adverse effect upon the Company's
business, results of operations or financial condition, particularly in the
quarters immediately following the consummation of such transactions, due to
operational disruptions, severance expenses, unexpected expenses and accounting
charges which may be associated with the integration of such acquisitions.
Management Changes; No Assurance of Successful Expansion of Operations. Most
of the Company's senior management team have joined the Company within the last
two years. There can be no assurance that these individuals will be able to
achieve and manage growth, if any, or build an infrastructure necessary to
operate the Company. The Company's ability to compete effectively and to manage
any future growth will require that the Company continue to assimilate new
personnel and to expand, train and manage its work force. The Company intends
to continue to increase the scale of its operations significantly to support
anticipated increases in revenues, and to address critical infrastructure and
other requirements. These increases have included and will include the leasing
of new space, the opening of additional foreign offices, the Acquisitions and
other potential acquisitions, significant increases in research and development
to support product development, and the hiring of additional personnel in sales
and marketing. The increased scale of operations has resulted in significantly
higher operating expenses, which are expected to continue to increase
significantly in the future. If the Company's revenues do not correspondingly
increase, the Company's results of operations would be materially and adversely
affected. Expansion of the Company's operations has caused, and is continuing
to impose, a significant strain on the Company's management, financial and other
resources. The Company's ability to manage its recent, and any future, growth
(should it occur) will depend upon a significant expansion of its internal
management systems and the implementation and subsequent improvement of a
variety of systems, procedures and controls. Any failure to expand these areas
and implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the Company's business, could have a material
adverse effect on the Company's business, financial condition, and results of
operations. In this regard, any significant revenue growth will be dependent in
significant part upon the Company's expansion of its marketing, sales and BSP
support capabilities. This expansion will continue to require significant
expenditures to build the necessary infrastructure. There can be no assurance
that the
21
Company's efforts to expand its marketing, sales and customer support efforts
will be successful or will result in additional revenues or profitability in any
future period.
22
Dependence on Key Personnel. The Company's future performance depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support, and product development personnel. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development and
customer support. The Company believes that there may be only a limited number
of persons with the requisite skills to serve in those positions, and that it
may become increasingly difficult to hire such persons. Competitors and others
have in the past, and may in the future, attempt to recruit the Company's
employees. The loss of key management or technical personnel, or the failure to
attract and retain key personnel, could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Dependence on Proprietary Technologies; Risk of Infringement. The Company's
performance depends in part on its ability to protect its proprietary rights to
the technologies used in its principal products. The Company relies on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect its proprietary rights,
which are measures that afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products, or to obtain and use information that
the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights in the United States or abroad will be
adequate, or that competitors will not independently develop similar
technologies. The Company is not aware that it is infringing any proprietary
rights of third parties. In August 1994, a third party notified the Company
that it believes that one of the Company's products is infringing a patent held
by such third party. The Company subsequently notified such third party that it
does not believe that such product infringed such patent. Neither party has
communicated with the other since January 1995. If the third party should file
suit against the Company, and should it be determined that its patent is valid
and infringed by the Company's product, the Company may redesign the allegedly
infringing product or seek to obtain a license from such third party. Any
redesign may be costly and time consuming, may not avoid litigation, and would
materially and adversely affect the Company's business, results of operations,
and financial condition. If it becomes necessary to seek a license from such
third party, there can be no assurance that the Company will be able to obtain
such a license on acceptable terms. Moreover, there can be no assurance that
additional third parties will not claim infringement by the Company's products
of their intellectual property rights. The Company expects that software
product developers will increasingly be subject to infringement claims if the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, and regardless of the outcome of any litigation,
will be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays, or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, if at all. In the event of a successful claim of infringement
against the Company's products and the failure or inability of the Company to
license the infringed or similar technology, the Company's business, results of
operations, and financial condition would be materially and adversely affected.
The Company also licenses software from third parties, software which is
incorporated into its products, including software incorporated into its viewer,
image decompression software and optical character recognition, and full-text
engines. These licenses expire from time to time. There can be no assurance
that these third-party software licenses will continue to be available to the
Company on commercially reasonable terms. While the Company believes that all
of such third-party software is available from alternate vendors, and the
Company maintains standard software escrow agreements with each of such parties,
agreements which provide the Company with access to the source code in the event
of their bankruptcy or insolvency, the loss of, or inability to maintain, any
such software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which in turn could materially and adversely affect the Company's business,
results of operations, and financial condition. In addition, the Company
generally does not have access to source code for the software supplied by these
third parties. Certain of these third parties are small companies that do not
have extensive financial and technical resources. If any of these relationships
were terminated or if any of these third parties were to cease doing business,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of
23
operations, and financial condition. The Company has entered into source code
escrow agreements with a limited number of its customers and resellers,
requiring release of source code in certain circumstances. Such agreements
generally provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy proceeding by or against
the Company, if the Company ceases to do business, or if the Company fails to
provide timely responses to identified product defects.
International Operations. Sales outside the United States accounted for
approximately 15% and 29% of the Company's revenues in 1995 and 1996,
respectively. An important element of the Company's strategy is to expand its
international operations, including the development of certain third-party
distributor relationships and the hiring of additional sales representatives,
each of which involves a significant investment of time and resources. There
can be no assurance that the Company will be successful in expanding its
international operations. In addition, the Company has only limited experience
in developing localized versions of its products and marketing and distributing
its products internationally. There can be no assurance that the Company will
be able to successfully localize, market, sell and deliver its products
internationally. The inability of the Company to successfully expand its
international operations in a timely manner could materially and adversely
affect the Company's business, results of operations, and financial condition.
The Company's international revenues may be denominated in foreign or United
States currency. The Company does not currently engage in foreign currency
hedging transactions; as a result, a decrease in the value of foreign currencies
relative to the United States dollar could result in losses from transactions
denominated in foreign currencies, could make the Company's software less price-
competitive, and could have a material adverse effect upon the Company's
business, results of operations, and financial condition. In addition, the
Company's international business is, and will continue to be, subject to a
variety of risks, including: delays in establishing international distribution
channels; difficulties in collecting international accounts receivable;
increased costs associated with maintaining international marketing and sales
efforts; unexpected changes in regulatory requirements, tariffs and other trade
barriers; political and economic instability; limited protection for
intellectual property rights in certain countries; lack of acceptance of
localized products in foreign countries; difficulties in managing international
operations, potentially adverse tax consequences including, restrictions on the
repatriation of earnings; and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international revenues and,
consequently, the Company's results of operations. Although the Company's
products are subject to export controls under United States laws, the Company
believes it has obtained all necessary export approvals. However, the inability
of the Company to obtain required approvals under any applicable regulations
could adversely affect the ability of the Company to make international sales.
Product Liability; Risk of Product Defects. The Company's license agreements
with its customers typically contain provisions designed to limit the Company's
exposure to potential product liability claims. However, it is possible that
the limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations, and financial condition. Software products such as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing, the Company has in the past released
products that contained defects, and has discovered software errors in certain
of its new products and enhancements after introduction. The Company could in
the future lose or delay recognition of revenues as a result of software errors
or defects, the failure of its products to meet customer specifications or
otherwise. The Company's products are typically intended for use in
applications that may be critical to a customer's business. As a result, the
Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for general software products.
Although the Company's business has not been materially and adversely affected
by any such errors, or by defects or failure to meet specifications, to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors or defects will not be found in new products or
releases after commencement of commercial shipments, or that such products will
meet customer specifications, resulting in loss or deferral of revenues,
diversion of resources, damage to the Company's reputation, or increased service
and warranty and other
24
costs, any of which could have a material adverse effect upon the Company's
business, operating results, and financial condition.
Uncertainty in Healthcare Industry; Government Regulation. The healthcare
industry is undergoing significant and rapid changes, including consolidation of
hospitals and other healthcare providers in order to form larger integrated
healthcare networks, as well as market-driven or government initiatives to
reform healthcare, which the Company anticipates will affect the operations and
procurement processes of healthcare providers, and which could force the Company
to reduce prices for its software. As the number of hospitals and other
healthcare providers decreases due to further industry consolidation, each
potential sale of the Company's software will become more significant and
competition for each sale will be greater. Further, healthcare providers may
react to proposed reform measures and cost containment pressures by curtailing
or delaying investments, including purchases of the Company's software and
related services. In addition, numerous proposals relating to healthcare reform
have been, and additional proposals are expected to be, introduced in the United
States Congress and state legislatures. Although the effects of federal and
state initiatives for healthcare reform are unknown, the Company believes that
competitive factors in the healthcare industry will continue to drive reform of
healthcare delivery. The Company cannot predict with any certainty what impact,
if any, such market or government initiatives might have on its business,
financial condition and results of operations. The United States Food and Drug
Administration ("FDA") has issued a draft guidance document addressing the
regulation of certain computer products as medical devices under the Federal
Food, Drug and Cosmetic Act. To the extent that computer software is a medical
device under the policy, the manufacturers of such products could be required,
depending on the product, to: (i) register and list their products with the FDA,
(ii) notify the FDA and demonstrate substantial equivalence to other products on
the market before marketing such products or (iii) obtain FDA approval by filing
a premarket application that establishes the safety and effectiveness of the
product. The Company expects that the FDA is likely to become increasingly
active in regulating computer software that is intended for use in healthcare
settings, although the FDA does not currently regulate computer software
products for medical records. The FDA, if it chooses to regulate such software,
can impose extensive requirements governing pre- and post-market conditions such
as device investigation, approval, labeling and manufacturing. In addition, any
substantial reduction in price, failure of the Company to sell its software to
hospitals and other healthcare providers, or increased government regulation,
could have a material adverse effect on the Company's business, results of
operations, and financial condition. Such products would be subject to the
Federal Food, Drug and Cosmetic Act's general provisions, including those
relating to good manufacturing practices and adverse experience reporting. The
Company is also subject to the risks inherent in selling its products to end-
users in other heavily regulated industries, such as insurance, banking and
financial services.
Potential Volatility of Stock Price. The market price of shares of Common
Stock is likely to be highly volatile and may be significantly affected by
factors such as: actual or anticipated fluctuations in the Company's operating
results; announcements of technological innovations; new products or new
contracts by the Company or its competitors; sales of Common Stock by
management; sales of significant amounts of Common Stock into the market;
developments with respect to proprietary rights; conditions and trends in the
software and other technology industries; adoption of new accounting standards
affecting the software industry; changes in financial estimates by securities
analysts and others; general market conditions; and other factors that may be
unrelated to the Company or its performance. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against such company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation, regardless of its outcome, would result in
substantial costs and a diversion of management's attention and resources which
could have a material adverse effect upon the Company's business, results of
operations, and financial condition.
Control by Existing Stockholders; Effects of Certain Anti-Takeover
Provisions. Members of the Board of Directors, and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates of, or related to, such persons or entities, beneficially own
approximately 53% of the
25
outstanding shares of Common Stock of the Company. Accordingly, these
stockholders would, if acting in concert, be able to elect all members of the
Company's Board of Directors and determine the outcome of corporate actions
requiring stockholder approval, such as mergers and acquisitions. Certain
provisions of the Company's Certificate of Incorporation, equity incentive
plans, Bylaws, and Delaware law may also discourage certain transactions
involving a change in control of the Company. This level of ownership by such
persons and entities, when combined with the Company's classified Board of
Directors and the ability of the Board of Directors to issue "blank check"
preferred stock without further stockholder approval, may have the effect of
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 21,500 square feet
of office space in Colorado Springs, Colorado. The Company occupies these
premises under a lease expiring July 1997. In support of its field sales and
support organization, the Company also leases facilities and offices in seven
other locations in the United States, one location in the United Kingdom, one
location in Singapore, one location in Hong Kong, one in Malaysia and one in
Australia. The Company believes that it will require additional space upon the
expiration of its lease in July 1997, and has entered into an agreement to lease
approximately 39,000 square feet of office space in Colorado Springs commencing
April 1997. The Company expects to incur additional capital expenditures in
connection with the preparation of the new facility for occupancy, some of which
may be material.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, and is
currently not aware of any pending or threatened litigation that could have a
material adverse effect upon the Company's business, operating results, or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "OPTK." The Company commenced its initial public
offering of Common Stock on July 25, 1996 at a price of $6 per share. Prior to
such date, there was no public market for the Common Stock. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market.
HIGH LOW
Quarter ended December 31, 1996................................... $ 8.25 $5.02
Quarter ended September 30, 1996 (from July 25,1996).............. $ 9.00 $5.25
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company's bank line of credit currently prohibits the
payment of cash dividends without the consent of the bank. Certain other
information required by this Item is incorporated by reference from the
Company's 1996 Annual Report to Stockholders.
27
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1996 and the consolidated balance sheet data at December 31, 1995 and 1996, are
derived from the audited consolidated financial statements included in Item 8.
The consolidated statement of operations data for each of the two years in the
period ended December 31, 1994, and the consolidated balance sheet data at
December 31, 1992, 1993 and 1994, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
Consolidated Statement of Operations Data: (in thousands, except per share amounts)
Revenues:
Licenses............................................... $ 13,406 $ 8,333 $ 7,562 $ 6,924 $ 3,531
Maintenance and other.................................. 3,297 2,135 1,690 2,119 1,240
--------- --------- --------- -------- --------
Total revenues....................................... 16,703 10,468 9,252 9,043 4,771
Cost of revenues:
Licenses............................................... 585 316 413 471 275
Maintenance and other.................................. 1,930 1,823 1,889 2,073 613
--------- --------- --------- -------- --------
Total cost of revenues............................... 2,515 2,139 2,302 2,544 888
--------- --------- --------- -------- --------
Gross profit............................................. 14,188 8,329 6,950 6,499 3,883
Operating expenses:
Sales and marketing.................................... 7,332 3,732 4,200 2,585 1,466
Research and development............................... 4,624 3,658 3,112 2,332 1,454
General and administrative............................. 1,367 1,461 1,513 1,037 845
--------- --------- --------- -------- --------
Total operating expenses............................. 13,323 8,851 8,825 5,954 3,765
--------- --------- --------- -------- --------
Income (loss) from operations............................ 865 (522) (1,875) 545 118
Other (income) expenses.................................. (229) 411 25 476 53
--------- --------- --------- -------- --------
Income (loss) before provision........................... 1,094 (933) (1,900) 69 65
(benefit) for income taxes
Provision (benefit) for income taxes..................... (813) 29 (168) 42 104
--------- --------- --------- -------- --------
Net income (loss)........................................ $ 1,907 $ (962) $ (1,732) $ 27 $ (39)
========= ========= ========= ======== ========
Unaudited pro-forma net income (loss) per common
share (1)............................................... $ 0.29 $ (0.20)
Unaudited pro-forma weighted average number of common
shares outstanding (1).................................. 6,615 4,811
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
Consolidated Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term investments........ $ 11,499 $ 1,415 $ 771 $ 1,741 $ 110
Working capital.......................................... 13,817 1,841 1,338 2,151 632
Total assets............................................. 20,258 6,182 4,450 5,102 2,223
Long-term debt, excluding current portion................ 136 266 353 353 546
Convertible preferred stock.............................. - 4,804 3,343 2,346 411
Total stockholders' equity (deficit)..................... 15,849 (1,967) (1,497) 213 159
(1) See Note 1 to Notes to Consolidated Financial Statements.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AND THOSE UNDER THE CAPTION "BUSINESS RISKS" IN
ITEM 1, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR THOSE ANTICIPATED.
Overview
Optika is a leading provider of high-performance, client/server, integrated
imaging software designed to meet the needs of paper intensive industries such
as healthcare, financial services, insurance, and large retail organizations.
As a result of growth in its core imaging business, the Company generated
revenues of approximately $4.8 million and $9.0 million during 1992 and 1993,
respectively, and operating income of approximately $118,000 and $545,000.
During 1994, under the direction of its former senior management team, the
Company sought to diversify beyond its core business and entered the market for
lower-end imaging systems by acquiring TEAMWorks. Concurrently, the Company
attempted to enter the market for large customized imaging solutions by forming
a complex imaging group. The Company believed that it could market the TEAMWorks
products to end-users through direct mail, and that the complex imaging group
could market large customized imaging solutions to end users through a direct
sales force. In order to execute this new strategy, the Company created a direct
sales and marketing infrastructure and implementation team to support the
complex imaging group, while maintaining corporate facilities in both
Massachusetts and Colorado to support the TEAMWorks products. Neither strategy
proved to be successful because the TEAMWorks products did not achieve market
acceptance and the Company lacked experience in selling such products, and
because the complex imaging group's direct sales force created conflict in the
Company's distribution channels. In addition, issues associated with the
integration of TEAMWorks and other problems led to significant senior management
distraction and delayed the release of new versions of the Company's core
products. As a result of the foregoing factors, the Company's 1994 revenues
increased only 2% to $9.3 million from $9.0 million in the prior year, and the
Company incurred an operating loss of $1.9 million. At the end of 1994, under
the direction of an interim CEO, the Company eliminated its direct sales and
support infrastructure and dissolved the complex imaging group.
Commencing in February 1995, under the direction of Mark K. Ruport, its new
President and CEO, the Company replaced a majority of its senior management team
and refocused its sales, marketing, and research and development efforts on its
core imaging products. During the first six months of 1995, the Company also
began to develop a decentralized sales staff to support its indirect
distribution channels, eliminated the TEAMWorks infrastructure, and focused on
the development of its integrated product suite.
During the second half of 1995 and continuing into 1996, the Company began to
implement a strategy based on extending its technology leadership in open
component-based imaging solutions, integrating its core imaging software
products into the FilePower Suite, strengthening its indirect distribution
channels, focusing on imaging solutions which scale from workgroups to
enterprises, lowering the total cost of ownership to its customers, and
developing the FPhealthcare Suite for the healthcare market. In August 1995, the
Company released the FilePower Suite, its first integrated imaging product
suite. The Company also began to commit substantial resources to strengthen its
indirect distribution channel of OEMs and BSPs. Sales and marketing expenses
increased from $1.6 million in the first six months of 1995 to $2.1 million
during the last six months of 1995, and to $2.9 million in the first six months
of 1996, an increase of 34% and 84%, respectively. The Company believes that
these efforts were significant factors in its recent revenue growth, including a
60% growth in total revenues during the twelve months ended December 31, 1996,
compared to the corresponding prior period. Healthcare revenues increased from
approximately 5% of total revenues in 1995, to approximately 13% of total
revenues during 1996. After experiencing
29
operating losses in 1994 and in the first two quarters of 1995, the Company
returned to operating profitability in the third quarter of 1995 and has
achieved an operating profit in each of the six subsequent quarters. There can
be no assurance, however, that such profitability will be maintained in the
future. (See "Business Risks--History of Losses; Accumulated Deficit; Future
Results of Operations Uncertain," "--Significant Fluctuations in Operating
Results" and "--Management Changes; No Assurance of Successful Expansion of
Operations.")
The license of the Company's software products is typically an executive-
level decision by prospective end-users and generally requires the Company and
its BSPs or OEMs to engage in a lengthy and complex sales cycle (typically
between six and twelve months from the initial contact date). The Company
distributes its products through a worldwide network of approximately 212 BSPs
and eight OEMs. For both 1995 and 1996, approximately 89% of the Company's total
revenues were derived from its BSPs and approximately 11% of its total revenues
were derived from sales by OEMs. In 1996, the Company's top 53 BSPs accounted
for approximately 80% of its total revenues. However, no individual BSP
accounted for more than 10% of the Company's total revenues. For the years ended
December 31, 1995 and 1996, the Company generated approximately 15% and 29%,
respectively, of its total revenues from international sales.
The Company's revenues consist primarily of license revenues, which are
comprised of one-time fees for the license of the Company's products; and
maintenance revenues, which are comprised of fees for upgrades and technical
support. The BSPs and OEMs, which are responsible for the installation and
integration of the software, enter into sales agreements with the end-user, and
purchase software directly from the Company. The software is licensed directly
to the end-user by the Company through a standard shrink-wrapped license
agreement. Annual maintenance agreements are also entered into between the BSPs
and OEMs and the end-user, and the BSPs and OEMs then purchase maintenance
services directly from the Company. For both 1995 and 1996, approximately 80% of
the Company's total revenues were derived from software licenses and
approximately 11% and 14%, respectively, of the Company's total revenues were
derived from maintenance agreements. Other revenues, which are comprised of
training, consulting and implementation services, and third-party hardware and
software products, accounted for 9% and 6%, respectively, of the Company's total
revenues.
License revenues are generally recognized upon shipment when no significant
vendor obligations remain and collectibility is probable. License revenues
related to contracts with significant post-delivery performance obligations are
recognized when the Company's obligations are no longer significant or when the
customer accepts the product, as applicable. Maintenance revenues are deferred
and recognized ratably over the maintenance period, which is generally one year.
Other revenues are recognized as services are performed. Based on the Company's
research and development process, costs incurred between the establishment of
technological feasibility and general release of the software products have not
been material and therefore have not been capitalized in accordance with
Statement of Financial Accounting Standards No. 86. All research and development
costs have been expensed as incurred. See Note 1 of Notes to Consolidated
Financial Statements.
The Company generally does not grant rights to return products, except for
defects in the performance of the products relative to specifications; and
pursuant to standard industry shrink-wrapped license agreements, which provide
for 30-day rights of return if an end-user does not accept the terms of the
software license; nor does it provide provisions for price adjustments or
rotation rights. However, if other rights of return are granted, revenue
recognition is deferred until such rights lapse. The Company's aggregate product
returns have historically been insignificant. The Company's terms of sales
generally range from 30 to 60 days from date of shipment for BSPs and OEMs.
Terms of sales on major accounts are generally based on the achievement of
installation milestones and final system acceptance.
30
Results of Operations
Comparison of Years Ended December 31, 1996 to December 31, 1995
Revenues
Total revenues increased 60% from $10.5 million for the year ended December
31, 1995 to $16.7 million for the year ended December 31, 1996.
Licenses. License revenues increased 61% from $8.3 million for the year
ended December 31, 1995 to $13.4 million for the year ended December 31, 1996,
representing approximately 80% of total revenues in both periods. This
increase was primarily the result of increased unit sales of components of the
FilePower Suite. The increased unit sales were driven, in part, by a
significant increase in sales to international customers, primarily in Asia and
the United Kingdom, and continued growth of sales in the healthcare market.
License revenues generated outside of the United States increased from
approximately 16% of license revenues for the year ended December 31, 1995 to
approximately 31% of license revenues for the year ended December 31, 1996.
License revenues from the healthcare industry increased from 5% of license
revenues for the year ended December 31, 1995, to 15% of license revenues for
the year ended December 31, 1996.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 112%, from approximately $1.1 million during the year ended December
31, 1995, to $2.4 million for the year ended December 31, 1996, representing
approximately 11% of total revenues for the year ended December 31, 1995 and 14%
of total revenues for the year ended December 31, 1996. This increase was
primarily a result of an increase in the number of installed systems and the
Company's improved tracking and monitoring of expiring maintenance contracts.
Other revenue, consisting primarily of training and consulting fees, represented
9% and 6% of total revenue for the years ended December 31, 1995 and 1996,
respectively.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to third-
party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales; and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $316,000, or 4% of license
revenues, for the year ended December 31, 1995, to $585,000, or 4% of license
revenues, for the year ended December 31, 1996, primarily as a result of the
increased number of licenses sold during the period.
Maintenance and Other. Cost of maintenance and other consists of the direct
and indirect costs of providing software maintenance and support, training and
consulting services, to the Company's BSPs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from
$1.8 million, or 85% of maintenance and other revenues, for the year ended
December 31, 1995, to $1.9 million, or 59% of maintenance and other revenues,
for the year ended December 31, 1996. This increase was primarily due to
increased staffing for customer support, and was partially offset by a decreased
third-party software component, which has a lower gross profit margin, in the
year ended December 31, 1996.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries; commissions and other related expenses for sales and marketing
personnel; marketing; advertising; and promotional expenses. Sales and
marketing expenses increased from $3.7 million, or 36% of total revenues, for
the year ended December 31, 1995, to $7.3 million, or 44% of total revenues, for
the year ended December 31, 1996. This increase was primarily attributable in
increased staffing for sales and marketing activities. In mid-1995, the Company
opened six regional sales offices in the United States, and during 1996 the
Company expanded its operations in Asia with the opening of sales offices in
Hong Kong, Singapore and Malaysia. The Company anticipates that sales and
marketing expenses will continue to increase in absolute dollars in 1997 as the
Company continues to build and expand its network of BSPs and OEMs.
31
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and
development expenses increased from $3.7 million, or 35% of total revenues, for
the year ended December 31, 1995, to $4.6 million, or 28% of total revenues, for
the year ended December 31, 1996. The increase was primarily due to increased
staffing in order to develop enhancements to the FilePower Suite and to continue
the development of the FPhealthcare Suite. The Company expects research and
development expenses to continue to increase in absolute dollars in 1997 to fund
the development of new products and product enhancements.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel, and outside professional fees. General and
administrative expenses decreased from $1.5 million, or 14% of total revenues,
for the year ended December 31, 1995, to $1.4 million, or 8% of total revenues,
for the year ended December 31, 1996. The decrease was primarily due to the
Company incurring severance payments, and recruiting and relocation expenses in
connection with the senior management reorganization during the first six months
of 1995. This decrease was partially offset by increased staffing and related
expenditures. General and administrative expenses are expected to increase in
absolute dollars in 1997 as the Company expands its staffing to support expanded
operations and to comply with the responsibilities of a public company.
Other Expenses. Other expenses consist primarily of interest expense on the
Company's capitalized lease obligations, and other debt, offset by interest
earned on the Company's financing activities. The Company incurred a net
expense of $411,000 during the year ended December 31, 1995, compared to a net
income of $229,000 during the year ended December 31, 1996. During 1995 the
Company settled certain litigation as discussed in Note 5 of Notes to
Consolidated Financial Statements. Approximately $373,000 of settlement costs
and legal expenses are included in other expenses for 1995. Other income for
1996 was primarily a result of interest income derived from the investment of
the Company's initial public offering proceeds.
Provision (benefit) for Income Taxes. Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109. Due to the
Company's history of pre-tax losses, and to the uncertainty surrounding the
timing of realizing benefits of its favorable tax attributes, the Company had
recorded a valuation allowance against all of its favorable tax assets as of
December 31, 1995. In reaching the Company's determination of the need to
provide a deferred tax valuation allowance, the Company considered all available
evidence, both positive and negative, as well as the weight and importance given
such to evidence. As required by Statement of Financial Accounting Standards
No. 109, management concluded that a valuation allowance against deferred tax
assets was no longer appropriate as of December 31, 1996. Specifically, during
1996, the Company generated four straight quarters of profitability and pre-tax
income of $1.1 million.
Comparison of Years Ended December 31, 1995 to December 31, 1994
Revenues
Total revenues increased 13% from $9.3 million in 1994 to $10.5 million in
1995. Revenue growth accelerated from 2% during the first six months of 1995,
compared to the first six months of 1994, to 24% during the last six months of
1995, compared to the last six months of 1994, as the Company began to implement
its new strategy under its new management team.
Licenses. License revenues increased 10% from $7.6 million in 1994 to $8.3
million in 1995, representing 82% and 80% of total revenues in their respective
periods. The increase in license revenues was primarily due to sales associated
with the release of the FilePower Suite in August 1995, increased sales through
indirect distribution channels and increased international sales in Asia and
Latin America.
Maintenance and Other. Maintenance and other revenues increased 26% from
$1.7 million in 1994 to $2.1 million in 1995, representing 18% and 20% of total
revenues in their respective periods, primarily as a result of an increase in
the number of installed systems and the Company's improved tracking and
monitoring of expiring maintenance contracts.
32
Cost of Revenues
Licenses. Cost of licenses decreased from $413,000 or 5% of license
revenues, in 1994 to $316,000, or 4% of license revenues, in 1995, primarily as
a result of lower royalty costs on third-party developed software.
Maintenance and Other. Cost of maintenance and other decreased from $1.9
million, or 112% of maintenance and other revenues, in 1994 to $1.8 million, or
85% of maintenance and other revenues, in 1995, primarily as a result of the
Company's reduction in implementation services associated with the complex
imaging group.
Sales and Marketing. Sales and marketing expenses decreased from $4.2
million, or 45% of total revenues, in 1994, to $3.7 million, or 36% of total
revenues, in 1995, primarily due to the elimination of the complex imaging group
and the sales and marketing infrastructure the Company had built to market the
TEAMWorks products. Sales and marketing expenses increased from $1.6 million in
the first six months of 1995 to $2.1 million during the last six months of 1995,
an increase of 34%, as the Company began to build and expand its network of BSPs
and OEMs.
Research and Development. Research and development expenses increased from
$3.1 million, or 34% of total revenues, in 1994, to $3.7 million, or 35% of
total revenues, in 1995, primarily as a result of additional staff hired in 1995
to develop enhancements to the FilePower Suite and continue the development of
the FPhealthcare Suite.
General and Administrative. General and administrative expenses remained
constant at $1.5 million in 1994 and 1995, representing 16% and 14% of total
revenues, respectively, primarily as a result of the Company discontinuing the
general and administrative functions that were acquired in connection with the
TEAMWorks Acquisition, and which in turn were offset by the costs of
restructuring the Company's senior management team.
Other Expenses. In 1995, other expenses included $373,000 related to the
settlement of outstanding litigation. The expense included settlement costs and
legal fees.
Provision (benefit) for Income Taxes. The Company recognized a tax benefit
of $168,000 in 1994 principally as a result of net operating loss carrybacks.
The Company recognized minimal income tax expense in 1995 resulting from taxable
income in the Company's UK subsidiary. As of December 31, 1995, the Company's
net operating loss carryforwards were approximately $2.3 million and expire in
varying amounts from 2009 through 2010. Additionally, the Company has various
tax credit carryforwards aggregating approximately $341,000, which expire
between 2005 and 2009. The Company's ability to use the net operating loss
carryforwards against taxable income are subject to restrictions and limitations
under the Internal Revenue Code of 1986 (the "Code"), as amended, in the event
of a change of ownership within the meaning of the Code.
Liquidity and Capital Resources
Cash and short-term investments at December 31, 1996 were $11.5 million,
increasing $10.1 million from December 31, 1995. The increase in cash and
short-term investments is primarily due to the proceeds of the Company's initial
public offering in July 1996.
For the year ended December 31, 1995, net cash used in operating activities
was $127,000, compared to $409,000 for the year ended December 31, 1996. This
was primarily attributable to the growth in Company revenue over the same
period, which resulted in an increase in the Company's accounts receivable
balance. {Add Discussion - get from Tod
Cash used in investing activities was $208,000 for the year ended December
31, 1995 compared to $8.6 million for the year ended December 31, 1996. Uses of
cash consisted primarily of purchases of short-term securities, and property and
equipment.
Cash provided from financing activities was $9796,000 for the year ended
December 31, 1995. Cash provided from financing activities was $11.1 million
for the year ended December 31, 1996. Cash provided from financing activities
resulted primarily from private sales of preferred stock in 1995, the proceeds
of the Company's initial public offering in 1996, and proceeds from and
repayments of bank borrowings, capital leases and other debt.
33
The Company has entered into an agreement to lease approximately 38,000
square feet of office space in Colorado Springs commencing during the second
quarter of 1997. The Company expects to incur additional capital expenditures in
connection with the preparation of the new facility for occupancy, some of which
may be material.
At December 31, 1996, the Company's principal sources of liquidity included
cash and short-term investments of $11.5 million. In addition, the Company has a
secured credit facility for up to $3.0 million, bearing interest at the bank's
prime rate plus .75%. As of December 31, 1996, the Company had $2.8 million
available for borrowing. The Company also has a term note with a principal
balance of $195,000 at December 31, 1996, bearing interest at the bank's prime
rate plus 2.0%. The term note is repayable in 30 equal installments of principal
and accrued interest commencing July 1996. In addition, the Company has
outstanding a two-year secured note with principal balance of $173,000 at
December 31, 1996, bearing interest at 10.75%.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations and its bank credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, the Company may
require additional funds to support such activity through public or private
equity financings or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file a definitive proxy statement
pursuant to Regulation 14A no later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required by this item relating to the Company's directors and
nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers" in Part I of the Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1997 Annual Meeting of the Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
Page
----
1. Financial Statements:
Report of Independent Accountants...................................39
Consolidated Balance Sheet as of December 31,
1996 and 1995......................................................40
Consolidated Statement of Operations for each
of the three years in the period
ended December 31, 1996..........................................41
Consolidated Statement of Stockholders' Equity
(deficit)for each of the three years
in the period ended December 31, 1996............................42
Consolidated Statement of Cash Flows for each
of the three years in the period
ended December 31, 1996..........................................43
Notes to Consolidated Financial Statements..........................44
2. Financial Statement Schedule:
The following financial statement schedule of Optika Imaging Systems, Inc.,
for the years ended December 31, 1996, 1995 and 1994, is filed as part of this
Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements of Optika Imaging Systems, Inc.
All schedules have been omitted because they are not required, not
applicable, or the required information is shown in the financial statements
and related notes thereto.
3. Exhibits - See Item 14 (c) below.
(a) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended December
31, 1996.
(a) Exhibits
See Exhibit Index on page 53
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on March 28,
1997.
OPTIKA IMAGING SYSTEMS, INC.
By: /s/ MARK K. RUPORT
-------------------------
Mark K. Ruport
President, Chief Executive Officer
and Chairman of the Board
By: /s/ STEVEN M. JOHNSON
--------------------------
Steven M. Johnson
Chief Financial Officer, Vice President,
Finance and Administration, Secretary and
Chief Accounting Officer
37
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark K. Ruport and Steven M. Johnson, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and his name, place and deed,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Report on Form 10-K, and to file the same, with
all exhibits thereto, and other documents in conncetion therewith, with all
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 1997;
Signature Title
--------- -----
By: /s/ MARK K. RUPORT Chief Executive Officer and
---------------------- Chairman of the Board
Mark K. Ruport
By: /s/ STEVEN M. JOHNSON Chief Financial Officer, Vice
---------------------- President, Finance &
Steven M. Johnson Administration, Secretary and
Chief Accounting Officer
By: /s/ MALCOLM THOMSON Co-Founder and Director
----------------------
Malcolm Thomson
By: /s/ PAUL CARTER Co-Founder and Director
----------------------
Paul Carter
By: /s/ RICHARD A. BASS Director
----------------------
Richard A. Bass
By: /s/ JAMES E. CRAWFORD Director
----------------------
James E. Crawford
By: /s/ ROBERT L. GETT Director
----------------------
Robert L. Gett
By: /s/ HARRY S. GRUNER Director
----------------------
Harry S. Gruner
By: /s/ GRAHAM O. KING Director
----------------------
Graham O. King
38
Report of Independent Accountants
To the Board of Directors and
Stockholders of Optika Imaging Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Optika Imaging Systems, Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
January 31, 1997
Boulder, Colorado
39
Optika Imaging Systems, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31, December 31,
1996 1995
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents.............. $ 3,474 $ 1,415
Short-term investments................. 8,025 --
Accounts receivable, net of allowance
for doubtful accounts of $112
and $90 at December 31, 1996 and
1995, respectively................... 5,766 3,199
Other current assets................... 825 306
------- -------
Total current assets................ 18,090 4,920
------- -------
Fixed assets, net of accumulated
depreciation of $1,128 and $820 at
December 31, 1996 and 1995,
respectively.......................... 1,038 762
Notes receivable from related parties... -- 103
Other assets, net of accumulated
amortization of $228 and $120
at December 31, 1996 and 1995,
respectively.......................... 1,130 397
------- -------
$20,258 $ 6,182
======= =======
Liabilities, Redeemable Convertible
Preferred Stock
and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt...... $ 280 $ 177
Accounts payable....................... 808 627
Accrued vacation...................... 219 167
Accrued expenses....................... 1,107 563
Deferred revenue....................... 1,859 1,545
------- -------
Total current liabilities........... 4,273 3,079
------- -------
Long-term debt.......................... 136 266
Commitments and contingencies (Notes 5
and 9)
Preferred stock (-0- and 1,493,024
shares authorized at
December 31, 1996 and 1995,
respectively):
Series A mandatorily redeemable
convertible preferred stock; no par
value, 298,864 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 411
Series B mandatorily redeemable
convertible preferred stock; no par
value; 752,160 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 2,932
Series C mandatorily redeemable
convertible preferred stock; no par
value; 441,177 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 1,461
Common stockholders' equity (deficit):
Common stock; $.001 and no par value
at December 31, 1996 and
1995, respectively; 25,000,000
shares authorized; 6,670,319 and
2,843,930 shares issued and
outstanding at December 31, 1996
and 1995, respectively............... 7 799
Additional paid-in capital............. 16,701 --
Accumulated deficit.................... (859) (2,766)
------- -------
Total stockholders' equity
(deficit).......................... 15,849 (1,967)
------- -------
$20,258 $ 6,182
======= =======
The accompanying notes are an integral part of these financial statements.
40
Optika Imaging Systems, Inc.
Consolidated Statement of Operations
(In thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994
-------- -------- --------
Revenues:
Licenses..................................... $13,406 $ 8,333 $ 7,562
Maintenance and other........................ 3,297 2,135 1,690
------- ------- -------
Total revenues.............................. 16,703 10,468 9,252
Cost of revenues:
Licenses..................................... 585 316 413
Maintenance and other........................ 1,930 1,823 1,889
------- ------- -------
Total cost of revenues...................... 2,515 2,139 2,302
------- ------- -------
Gross profit.................................. 14,188 8,329 6,950
Operating expenses:
Sales and marketing.......................... 7,332 3,732 4,200
Research and development..................... 4,624 3,658 3,112
General and administrative................... 1,367 1,461 1,513
------- ------- -------
Total operating expenses.................... 13,323 8,851 8,825
------- ------- -------
Income (loss) from operations................. 865 (522) (1,875)
Other (income) expense:
Litigation settlements....................... -- 373 --
Interest and other (income) expenses, net.... (229) 38 25
------- ------- -------
Total other (income) expense, net........... (229) 411 25
------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................. 1,094 (933) (1,900)
Provision (benefit) for income taxes.......... (813) 29 (168)
------- ------- -------
Net income (loss)............................. $ 1,907 $ (962) $(1,732)
======= ======= =======
Unaudited pro-forma net income (loss) per
share........................................ $ .29 $ (.20) $ --
Unaudited pro-forma weighted average number
of common shares outstanding................. 6,615 4,811 4,795
The accompanying notes are an integral part of these financial statements.
41
Optika Imaging Systems, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(In thousands)
Total
Common
Common Stock Additional Stockholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- ------ ----------- ------------ -------------
Balance at December 31, 1993.............................. 2,567,376 $ 285 $ $ (72) $ 213
Common stock issued upon exercise
of stock options.................................. 28,000 22 22
Net loss............................................. (1,732) (1,732)
----------- ------ ----------- ------------ -------------
Balance at December 31, 1994.............................. 2,595,376 307 (1,804) (1,497)
Common stock issued upon exercise
of stock options.................................. 32,123 30 30
Warrants issued in settlement of
litigation........................................ 57 57
Common stock issued for acquisition.................. 216,431 405 405
Net loss............................................. (962) (962)
----------- ------ ----------- ------------ -------------
Balance at December 31, 1995.............................. 2,843,930 799 (2,766) (1,967)
Company reincorporation.............................. (796) $ 796
Common stock issued upon exercise
of stock options.................................. 125,925 102 102
Common stock issued upon initial
public offering................................... 2,200,000 2 11,001 11,003
Manditorily redeemable preferred stock
converted to common stock ........................ 1,500,464 2 4,802 4,804
Net income........................................... 1,907 1,907
----------- ------ ----------- ------------ -------------
Balance at December 31, 1996.............................. 6,670,319 $ 7 $ 16,701 $ (859) $ 15,849
=========== ====== =========== ============ =============
The accompanying notes are an integral part of these financial statements.
42
Optika Imaging Systems, Inc.
Consolidated Statement of Cash Flows
(In thousands)
Year Ended December 31,
1996 1995 1994
-------- ------- --------
Cash Flows From Operating Activities
Net income (loss).................................. $ 1,907 $ (962) $(1,732)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization.................... 492 338 219
Loss on disposal of assets....................... 4 15 --
Provision for loss on accounts receivable........ 22 (14) (76)
Litigation settlement............................ -- 282 --
Change in assets and liabilities:
Accounts receivable............................. (2,588) (677) 133
Deferred tax asset.............................. (885) -- --
Other assets.................................... (453) 64 (132)
Accounts payable................................ 182 (66) 230
Accrued expenses................................ 597 234 (394)
Deferred revenue................................ 313 659 455
------- ------ -------
Net cash used by operations................... (409) (127) (1,297)
------- ------ -------
Cash Flows From Investing Activities
Capital expenditures............................... (585) (316) (158)
Purchase of short-term investments................. (8,025) -- --
Cash acquired in acquisition....................... -- 108 --
------- ------ -------
Net cash used in investing activities......... (8,610) (208) (158)
------- ------ -------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock, net..... -- 1,461 997
Principal payments on long-term debt............... (456) (696) (534)
Proceeds from issuance of long-term debt........... 429 184 --
Proceeds from issuances of common stock............ 11,105 30 22
------- ------ -------
Net cash provided by financing
activities................................... 11,078 979 485
------- ------ -------
Net increase (decrease) in cash and cash
equivalents....................................... 2,059 644 (970)
Cash and cash equivalents at beginning of period... 1,415 771 1,741
------- ------ -------
Cash and cash equivalents at end of period......... $ 3,474 $1,415 $ 771
======= ====== =======
Supplemental Disclosure of Non-cash
Transactions
Capital lease obligations for purchase
of equipment...................................... $ -- $ -- $ 381
Interest paid...................................... 50 54 54
Income taxes paid (refund)......................... -- 130 (8)
Assets obtained in acquisition..................... -- 498 --
Liabilities assumed in acquisition................. -- 200 --
Stock issued in acquisition........................ -- 405 --
Note issued in litigation settlement............... -- 225 --
Warrants issued in litigation settlement........... -- 57 --
The accompanying notes are an integral part of these financial statements.
43
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business and Summary of Significant Accounting Policies
Optika Imaging Systems, Inc., a Delaware corporation, and its
subsidiaries ("Optika" or the "Company") was formed in 1988 and currently
develops and markets high-performance, client/server integrated imaging
software. The Company licenses its software under license agreements and
provides services including maintenance, training and implementation.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Optika Imaging Systems, Inc. and its wholly owned subsidiaries TEAMWorks
Technologies, Inc., Optika Imaging Systems Europe, Ltd. and Optika Asia, Inc.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
License revenues are generally recognized upon shipment when no
significant vendor obligations remain and collectibility is probable. License
revenues related to contracts with significant post-delivery performance
obligations are recognized when the Company's obligations are no longer
significant or when the customer accepts the product, as applicable.
Maintenance revenues for maintaining, supporting and providing upgrades are
deferred and recognized ratably over the maintenance period which is generally
one year. Other revenues consist of training, consulting and implementation
services and are recognized as such services are performed.
Cash Equivalents and Short-term Investments
The Company classifies short-term investments with an original maturity
of three months or less as cash equivalents. Short-term investments consist of
Corporate and U.S. Government obligations maturing within one year. Such
short-term investments are classified as held-to-maturity as defined by
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and accordingly carried at
amortized cost.
Depreciation and Amortization
Office equipment and furniture are recorded at cost and depreciated using
the straight-line method over estimated useful lives ranging from three to
five years. Goodwill represents the excess of the purchase price over the
fair market value of assets acquired and is being amortized over a four-year
period.
Software Development Costs
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards No. 86 (SFAS No. 86) requires the
capitalization of certain software development costs once technological
feasibility is established. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current revenue to total projected product revenue, whichever is greater. To
date, the period between achieving technological feasibility and the general
availability of such software has been short. Consequently, software
development costs qualifying for capitalization have been insignificant and
therefore, the Company has not capitalized any software development costs.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities as well as the reported amounts of
revenue and expenses. Significant estimates have been made by management in
several areas including the collectibility of accounts
44
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
receivable and the ability to realize deferred tax assets. Actual results
could differ from these estimates, making it reasonably possible that a change
in these estimates could occur in the near term.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including
cash, short-term investments, trade receivables and payables and long-term
debt, approximate their fair values.
Stock Compensation Plans
The Company applies APB Option No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock option and employee stock purchase
plans. The Company has adopted the disclosure provision of SFAS No. 123,
Accounting for Stock-Based Compensation.
Export Sales
The Company had export sales totaling approximately $4,811,450,
$1,542,500 and $1,205,000 for the years ended December 31, 1996, 1995 and
1994, respectively, in Europe, Asia and Latin America.
Pro-forma Net Income (Loss) Per Common Share (unaudited)
Pro-forma net income (loss) per common share is computed based on the
weighted average number of common shares outstanding and gives effect to
certain adjustments described below. Preferred stock which converted to common
stock upon the Company's initial public offering is assumed to be converted to
common stock for all periods presented. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion
would be antidilutive, except that, in conformity with SEC requirements, 1996,
1995 and 1994 net income (loss) per common share include common and common
equivalent shares issued during the twelve-month period prior to the filing of
the Company's July 1996 initial public offering have been included in the
calculation as if they were outstanding for all periods, using the treasury
stock method and the initial public offering price.
Concentration
The Company has historically relied on a limited number of products and
has concentrated risk related to the continued and future market acceptance of
such products. The Company currently has no major customers accounting for
more than 10% of its consolidated revenues; however, the Company's accounts
receivable are heavily concentrated with resellers of the Company's products.
Receivables from end users are not concentrated in any particular industry.
2. Business Combinations
On December 1, 1995, the Company acquired certain assets and assumed
certain liabilities of two of its resellers, IPRS-Asia (S) Pte. Ltd. and
Intuit Development Ltd. (the "acquired companies"). The acquisitions were
accounted for using the purchase method. The purchase price of the acquired
companies was 216,431 shares of common stock and resulted in $350,350 of
goodwill. Goodwill is being amortized on a straight-line basis over a four-
year period beginning January 1996.
On January 28, 1994, the Company issued approximately 272,400 shares of
its common stock for all of the outstanding common stock of TEAMWorks
Technologies, Inc. ("TEAMWorks"). The Company also reserved an additional
15,320 shares for issuance under Optika's stock option plan in connection with
the Company's assumption of TEAMWork's outstanding options. The combination
was accounted for as a pooling of interests and, accordingly, the consolidated
financial statements for all periods presented include the operations of
TEAMWorks. In June 1995, the Company terminated the operations of TEAMWorks
and recorded approximately $69,000 of expenses related to this termination.
45
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
3. Notes Receivable - Related Parties.
Notes receivable aggregating $103,000 at December 31, 1995 were due from
certain stockholders, officers and employees. The notes bear interest ranging
from 5% to 7.5% and were settled during 1996.
4. Line of Credit
During 1995, the Company entered into a $1,500,000 bank credit facility
with a bank. The terms of this credit facility were modified in September
1996. Pursuant to these changes, the Company is now able to draw up to $3.0
million for one year bearing interest at the bank's prime rate plus .75%. At
December 31, 1996, $2.8 million was available for borrowing thereunder.
Pursuant to the terms of the credit facility, any loans under said facility
would be secured by all of the Company's assets, with the exception of
intellectual property and would be subject to certain covenants. The Company
also has a term facility of $0.3 million to finance capital expenditures,
which bears interest at the bank's prime rate plus 2.0% (10.25% at December
31, 1996). Pursuant to the term facility, $195,000 was outstanding at December
31, 1996, which is secured by the equipment purchased thereunder. The term
facility is repayable in 30 equal installments of principal and accrued
interest commencing July, 1996. In addition, the Company has a two-year
secured note with a principal balance of $173,000 outstanding at December 31,
1996, bearing interest at 10.75%. This note matures in 1998.
5. Long-Term Debt and Lease Obligations
Long-term debt consists of the following (in thousands):
December 31,
--------------
1996 1995
------ ------
Term loan payable to a bank............................ $ 369 $ 185
Notes payable to stockholders; non-interest bearing;
balance due July 1997; unsecured...................... 43 43
Notes payable for litigation settlement, non-interest
bearing; unsecured.................................... -- 206
Other.................................................. 4 9
----- -----
416 443
Less current portion................................. (280) (177)
----- -----
$ 136 $ 266
===== =====
Notes Payable for Litigation Settlements
During 1995, the Company settled a lawsuit by two former associates of
the founders of the Company which included various breach of contract and tort
claims related to alleged contribution of the claimants to the formation of
the Company for $282,000 by issuing a non-interest bearing note and warrants
to purchase 95,000 shares of common stock. The warrants have an exercise price
of $1.875 per share and expire in 2000. The note was settled during 1996. The
Company also incurred $91,000 of legal expenses related to this litigation.
46
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
Debt Maturities
Scheduled maturities of long-term debt at December 31, 1996, are as follows
(in thousands):
Debt
Maturities
----------
1997................................. $ 309
1998................................. 132
1999................................. 12
----------
453
Less: amount representing interest.. (37)
----------
416
Less: current portion............... (280)
----------
$ 136
==========
Lease Commitments
The Company has non-cancelable operating lease arrangements for office
space and certain office equipment. Future minimum annual operating lease
payments are as follows (in thousands):
Operating
Lease
Obligations
-----------
1997..................................... $ 776
1998..................................... 664
1999..................................... 558
2000..................................... 550
2001..................................... 565
Thereafter............................... 3,296
---------
$ 6,409
=========
Rent expense related to these and other operating leases approximated
$727,000, $488,000, and $467,000 for the years ended December 31, 1996, 1995 and
1994.
6. Income Taxes
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
Year Ended
December 31,
---------------------------------
1996 1995 1994
---- ---- ----
Current:
Federal............................ $ -- $ -- $ (184)
State.............................. -- -- 1
Foreign............................ 72 29 15
Deferred:
Federal............................ (813) -- --
State.............................. (72) -- --
------- ------- ------
Total income tax expense (benefit). $ (813) $ 29 $ (168)
======= ======= ======
47
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
The Company's net deferred income tax assets are comprised of the tax
effects of the following (in thousands):
December 31, December 31,
1996 1995
------------ -------------
Gross Deferred Tax Assets
Net operating loss carryforwards...... $ 449 $ 895
Tax credit carryforwards.............. 278 341
Deferred revenue...................... -- 20
Accrued expenses...................... 158 113
--------- ----------
885 1,369
Less: deferred tax asset valuation
allowance........................... -- (1,359)
--------- ----------
885 10
--------- ----------
Gross Deferred Tax Liabilities
Accelerated tax depreciation.......... -- (10)
--------- ----------
Net deferred tax asset............... $ 885 $ --
========= ==========
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal income tax rate of 34% to income (loss) before
income taxes as follows (in thousands):
Year Ended
December 31,
----------------------------
1996 1995 1994
--------- ------- -------
U.S. federal income tax expense (benefit)
at statutory rate....................... $ 372 $ (317) $ (646)
Increases (decreases) resulting from:
Unrecognized benefit of net operating
loss carryforwards and future net
deductions.............................. -- 310 411
State taxes, net of federal benefit..... 38 -- --
Non-deductible items.................... 93 35 17
Decrease in valuation allowance......... (1,359) -- --
Foreign tax rate differentials.......... 20 (1) (13)
Effect of graduated tax rates in the
carryback period........................ -- -- 63
Other................................... 23 2 --
------- ------ -------
Provision (benefit) for income taxes...... $ (813) $ 29 $ (168)
======= ====== =======
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,367,000 which expire beginning in 2009 through 2010.
Additionally, the Company has various tax credit carryforwards aggregating
approximately $278,000 which expire beginning in 2005 through 2010.
48
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
7. Capital Stock and Stock Options
In July 1996 the Company effected a reincorporation from the State of
California into the State of Delaware, which changed the par value of the
Company's stock.
Mandatorily Redeemable Convertible Preferred Stock
The following table reflects activity of Series A, B and C preferred stock
for each of the three years ended December 31, 1996 (in thousands, except for
share data):
Mandatorily Redeemable
Convertible Preferred Stock
-----------------------------
Shares Amount
---------------- -----------
Balance at December 31, 1993............. 800,304 $ 2,346
Series B preferred stock issued for
cash, net............................... 250,720 997
---------- -------
Balance at December 31, 1994............. 1,051,024 3,343
Series C preferred stock issued for
cash, net............................... 441,177 1,461
---------- -------
Balance at December 31, 1995............. 1,492,201 4,804
---------- -------
Conversion of preferred stock............ (1,492,201) (4,804)
---------- -------
Balance at December 31, 1996............. 0 $ 0
========== =======
Upon the closing of the Company's initial public offering, all Series A, B
and C preferred stock automatically converted to shares of common stock at their
respective conversion rates. Series A and Series C preferred stock converted
into one share of common stock for each share of preferred stock. Series B
converted into approximately 1.011 shares of common stock for each share of
preferred stock.
Each share of outstanding Series A, Series B and Series C preferred stock
was entitled to as many votes as the number of shares of common stock into which
it was convertible.
49
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
Stock Compensation Plans
At December 31, 1996 the Company has two stock-based compensation plans.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plan and its employee stock purchase plan. Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of FASB Statement 123, the Company's pro-forma results of operations and
pro-forma net income (loss) per share would have been as follows:
(In thousands, except per share data)
1996 1995
----------------- -------------------
Net income (loss):
As reported.................. $1,907 $ (962)
Pro-forma.................... $1,403 $(1,089)
Net income (loss) per share:
As reported.................. $ 0.29 $ (0.20)
Pro-forma.................... $ 0.21 $ (0.23)
Fixed Stock Option Plan
Under the Company's stock option plan, the Company may grant incentive and
non-qualified stock options to its employees and directors for up to 2,790,000
shares of common stock. Under the plan, options are granted at an exercise price
not less than the fair market value of the stock on the date of grant. The
options generally vest ratably over four years and expire 10 years after the
date of grant. Certain options are subject to accelerated vesting provisions.
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996 and 1995, respectively; no estimated
dividends for either year; expected volatility of 77% for both years; risk-free
interest rates between 5.36% and 6.69% in 1996 and 5.51% and 7.05% in 1995; and
expected option terms of 5 years for both years.
50
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
A summary of the status of the Company's fixed option plan as of December
31, 1996, 1995 and 1994 and changes during the years then ending is presented
below. Included in the summary below are 95,000 warrants issued in 1995 in
settlement of a lawsuit, all of which are exercisable at December 31, 1996.
1996 1995 1994
--------------------------- ------------------------- -------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
--------------------------- ------------------------- -------------------------
Outstanding at beginning
of year 1,644 $ 1.56 941 $ 1.29 681 $ 0.95
Granted 492 $ 4.72 887 $ 1.88 372 $ 1.88
Exercised (126) $ 0.80 (32) $ 0.93 (28) $ 0.75
Forfeited (77) $ 2.50 (152) $ 1.82 (84) $ 1.35
-------- ------------ ------ ------------ ----- ------------
Outstanding at end of year 1,933 $ 2.38 1,644 $ 1.56 941 $ 1.29
======== ============ ====== ============ ===== ============
Options and warrants
exercisable at year end 729 $ 1.39 530 $ 0.95 454 $ 0.81
Weighted average fair value
of options granted during
the year $ 3.16 $ 1.26
Weighted average fair value
of warrants granted during
the year $ -- $ 1.25
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1996:
Options and Warrants
Options and Warrants Outstanding Exercisable
-------------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise Price at 12/31/96 Remaining Exercise at 12/31/96 Exercise
(000's) Contractual Life Price (000's) Price
-------------- ------------------ ------------ ------------ -----------
$ 0.44 - 1.87 1,463 6.9 $ 1.62 778 $1.39
$ 3.40 211 9.0 3.40 -- --
$ 5.00 - 6.50 259 9.5 5.85 1 6.50
------------ ------------- -------- --------- -----------
1,933 7.5 $ 2.38 779 $1.39
============ ============= ======== ========= ===========
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in May 1996 and approved by the Company's
stockholders in June 1996. Under the Purchase Plan, the Company is authorized to
issue up to 250,000 shares of common stock to eligible employees. Under the
terms of the Purchase Plan, employees may elect to have up to 10% of their total
cash earnings withheld by payroll deduction to purchase the Company's common
stock. The purchase price of the stock is 85% of the lower of the market price
on the participant's entry date into the Purchase Plan or the semi-annual
purchase date. During 1996, no shares of common stock were purchased under the
Purchase Plan.
51
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
8. 401(k) Retirement Savings Plan
Effective January 1, 1994, the Company adopted a qualified 401(k)
retirement savings plan for all employees. Participants may contribute up to 15%
of their gross pay. The Company contributions are discretionary and vest at 20%
per year over 5 years. The Company did not contribute to this plan in 1996, 1995
or 1994.
9. Contingencies
The Company is, from time to time, subjected to certain claims, assertions
or litigation by outside parties as part of its ongoing business operations. The
outcomes of any such contingencies are not expected to have a material adverse
effect on the financial condition or operations of the Company. In addition, in
the ordinary course of business, the Company has issued letters of credit as
security for performance on certain contracts and, as a result, is contingently
liable in the amount of approximately $220,000 at December 31, 1996.
52
EXHIBIT INDEX
-------------
Exhibit
No. Description
2.1(1) Form of Agreement and Plan of Merger of Optika Imaging Systems, Inc., a California
corporation, and the Registrant.
2.2(1) Agreement and Plan of Reorganization, dated January 31, 1994, by and between the
Registrant, TEAMWorks and certain other parties named herein.
2.3(1) Asset Purchase Agreement, dated November 13, 1995, by and among the Registrant,
Optika Asia, Inc., IPRS Asia (S) Pte Ltd., and other entities named therein.
3.1(1) Certificate of Incorporation of the Registrant.
3.2(1) Form of First Amended and Restated Certificate of Incorporation of the Registrant.
3.3(1) Form of Second Amended and Restated Certificate of Incorporation of the Registrant.
3.4(1) Bylaws of the Registrant.
4.1(1) Specimen Common Stock certificate.
4.2(1) Amended and Restated Shareholders' Agreement, dated November 25, 1995, by and among
the Registrant and the entities named therein.
4.3(1) Amended and Restated Registration Agreement, dated November 22, 1995, by and among
the Registrant and the entities named therein, including the First Amendment thereto.
4.4(1) Form of Warrant to purchase Common Stock dated November 1, 1995.
10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors
and officers.
10.2(1) The Registrant's 1994 Stock Option/Stock Issuance Plan, as restated and amended.
10.3(1) The Registrant's 1996 Management Incentive Compensation Plan.
10.4(1) The Registrant's Employee Stock Purchase Plan.
10.5(1) Loan and Security Agreement, dated June 16, 1995, by and between the Registrant
and Silicon Valley Bank, including Amendments No. 1 and 2 thereto.
10.6(1) Office Lease Agreement, dated December 1, 1992, by and between the Registrant
and Lincoln National, regarding the space located at 5755 Mark Dabling
Boulevard, Colorado Springs, Colorado, and the First Amendment thereto, dated
February 8, 1994.
10.7(1) Employment Agreement by and between the Registrant and Mr. Mark K. Ruport effective
February 18, 1995.
10.8(1) Employment Agreement by and between the Registrant and Mr. Steven M. Johnson,
effective May 15, 1996.
10.9(1) Employment Agreement by and between the Registrant and Mr. Marc Fey, effective
May 4, 1994.
10.10(1) Form of Business Solutions Partner (Reseller) Agreement.
53
10.11(1) Form of FilePower Suite Software License Agreement.
10.12(1) Technology Transfer Agreement, dated February 20, 1992, by and between the
Registrant, Mr. Paul Carter and Mr. Malcolm Thomson.
10.13(1) Commitment Letter for Line of Credit with Silicon Valley Bank.
10.14(2) Third Amendment to Loan and Security Agreement dated as of September 3, 1996,
by and between the Registrant and Silicon Valley Bank.
10.15 Fourth Amendment to Loan and Security Agreement dated as of December 9, 1996,
by and between the Registrant and Silicon Valley Bank.
10.16 Lease Agreement dated October 11, 1996, by and between the Registrant and
Woodman Office Campus II J.V. LLC for office space at 7450 Campus Drive,
Suite 200, Colorado Springs, Colorado.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney. (Included on Signature Page.)
24.7 Financial Data Schedule.
- ---------------------------
(1) Incorporated by reference to identically numbered exhibits included in
the Registrant's Registration Statement on Form S-1 (File No. 333-03637), as
amended.
(2) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 1996.
54